Why Cash in Hand Isn’t Very Handy

The Economic Times     4th December 2020     Save    

Context: Printing of money in a ‘depression’ economy to create demand, is highly unlikely to revive Covid-suppressed ‘animal spirits’.

Limitations of Direct Cash Transfers (DCTs):

  • Fiscal Deficit: Economists have been unable to define the deficit expected to be borne by the government to transfer money to the public.
    • Rangarajan has stated a fiscal deficit figure of 14% of GDP as the upper limit of a breached Fiscal Responsibility and Budget Management (FRBM) for the Centre and states combined.
  • Macroeconomic consequences: Infusing large amounts of cash can lead to depression in long-term, rather than reviving it to pre-pandemic levels; Rating downgrade by agencies will be imminent.
  • Leakages and corruption: Distribution of cash is fraught with leakages and corruption.
  • Lack of international precedence: Not a single other advanced economy has given more cash as a percentage of the total stimulus.
  • Technological limitations: Cost of establishing a formal secure money transfer infrastructure and logistical difficulties runs into billions of dollars.
  • Negative consequence of freebies: It is impossible to remove a freebie once doled out.

Some Government Steps to Support Public:

  • Direct Cash Transfer: Three major fiscal stimuli have been pushed, along with ?33,000 crores (about 0.15% of GDP) given to 210 million women into their Jan Dhan accounts.
  • Food: 800 million people are being provided with 5 kg of free food grains (25 kg per family), and the subsidy bill is about ?1.3 lakh crore for the last eight months alone.
  • Employment: MGNREGA allocation doubled from ?61,000crore(FY2019-20) to ?1.11lakh crore this year.

Conclusion: DCT is not the vaccine for reviving GDP, not even an anti-viral, but more like a steroid that can have deleterious side-effects and is hard to wean away from, even as it appears to be a panacea.