No direct monetization plan yet

 No direct monetization plan yet

• THE GOVERNMENTdoesnothave any plan to pursue direct monetization of its debt with the central
• bank at the moment, but plans to extend production linked incentives to more sectors to boost local manufacturing, Department of EconomicAffairsSecretary Tarun Bajaj said
• He said government revenues have started picking up with additional levies on petrol and diesel helping to raise tax mop-up.
• Whiledatafromvariousagencies, including World Bank and IMFsuggestGDPcontractionthis year, the economy is expected to recover sharply next year, indicating aV-shaped recovery, he said
• Monetization simply means that the RBI directly funds the central government’s deficit. Until 1997, the government used to sell securities— ad-hoc Treasury-Bills directly to the RBI, and not to financial market participants. This allowed the government to technically print equivalent amount of currency to meet its budget deficit. Amid falling revenues and a likely contraction in growth, the government has already increased its borrowing target by over 50 percent from Rs7.8lakh crore to Rs12 lakh crore may
• To boost domestic manufacturing, production-linked incentives announced for mobile and medical gear and pharma will be extendedto4-6more sunrise sectors with a lot of export potential. The Centre expects growth to come back from next year, while agriculture sector has been doing well even this year with good rabi crop production and expectations of a good Kharif crop as well. The government will soon decide on the privatization of two sets of six Indian airports, including those in Amritsar, Indore, Ranchi, Trichy, Bhubaneswar, and Raipur, he said

About Direct Monetisation 

• Monetization means Govt will borrow from RBI and will issue bonds to RBI directly (in the primary market) and RBI will print currency and give it to Govt. This practice was done until 1997 but then stopped. Stopped because in this mechanism govt can force RBI to give any amount of money at any interest rate leading to unaccountability and higher debt/fiscal deficit and inflation. Now, govt borrows from the market at the market interest rate and if govt will borrow more then the interest rate may move up and govt will have to pay more. And also, it cannot borrow for an indefinite period. As per the FRBM Act 2003, Govt can borrow directly from RBI (direct monetization) only in case of exceptional circumstances
• Indonesian Central bank has announced that it is going to do direct monetization.... it will print and give money to Indonesian govt.    Indian govt. is saying it is also open for such monetization in India.
• Direct monetization will lead to increase in fiscal deficit and rating agencies may degrade India's Sovereign Rating but there is a counterview also that if govt's higher spending will boost growth then it can have a positive impact
• Amidst rising debt level and falling revenue of govt, direct monetization could be a way to support govt spending but it can have implications on inflation, exchange rate, and rating

Key Points

• Right now govt don't have any plan for direct monetization and it wants to wait for 3/4 months to check the economic data whether it would be required or not
• The budgeted Fiscal Deficit for the year 2020-21 was around Rs. 7.9 lakh crore but now it has been increased to Rs. 12 lakh crore
• Production Linked Incentive Scheme (PLIS): Govt has already launched this scheme for mobile and medical gears AND govt is planning to extend this scheme for a few more sunrise (which has growth potential) sectors which have export potential. 
• PLIS is implemented in a complex way and no need to go in detail in this scheme. BUT let me give you an example of how it has been implemented for mobile phones.  If a company's sales of goods manufactured in India increases from a particular year (considered as the base year) then the Company will get an incentive of 4% to 6% on incremental/additional sales. For example, earlier a company was selling goods worth Rs. 1 lakh in a year and now its sales increased to Rs. 1.2 lakh. Then the company will get an incentive of 4% of Rs. 20,000 = Rs. 800 (No detail available that in which form this incentive will be given and no need to know). There is a condition of additional investment in plant and machinery also under this scheme.
• V - Shape Bounce Back (Recovery): Recession/Recovery shapes are used by economists to describe informally different types of recessions/recovery. The most commonly used terms are V-shaped, U-shaped, W-shaped, and L-shaped recessions. The shapes take their names from the approximate shape economic data make in graphs during recessions. The letters can also be applied referring to the recoveries (for example, a "V-shaped recovery"). No need to go in detail in all this. I am posting an image of various kinds of recession/recoveries. Just have a look.