Question: As the government grapples to arrange funds for public expenditure, experts have suggested to use helicopter money to increase spending. Can this measure help in overcoming problems in economy? Explain.
Answer: Helicopter money is a term used to describe large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero. In current scenario it may look economical but there are risks associated with it.
Advantages in helicopter money
- Avoid fiscal deficit situation
If government spends large amount out of its own revenue, a situation of deficit may arrive. By using helicopter money, the government will not increase its deficit because it does not involve borrowing instead it just supplies money printed and given by RBI.
- Increase public spending
By providing monetary support to citizens, consumer spending can be initiated. The current situation has arisen due to lack of consumer spending that had triggered slowdown. By rejuvenating spending rate demand and growth can be boosted.
- No liability on banking institutions
If government directs banks to issue loans to public without any proper collateral, there are chances that such loans become stressed accounts and banks will suffer due to loss assets. In helicopter money, the cash given to public will be in form of grants and there will not be any issue of loans.
Drawbacks in helicopter money
- Retail inflation
In current circumstances, consumer inflation is higher than usual but wholesale inflation is down due to various factors. If more money is provided to public, retail inflation may peak. This will give rise to demand pull inflation in the market.
- Depreciation of currency
Inflation and currency are directly linked with each other. If inflation rate increases, the currency value depreciates in the market. This will increase the cost of imports and our balance of payments will widen. This will again trigger our capital market to fall.
Thus, helicopter money is a good way for boosting demand for a limited period. In Indian context, structural changes are required that may give long term results.