PART 2 - HELICOPTER MONEY - CHILL PILL POST COVID-19

  PART 2 - HELICOPTER MONEY - CHILL PILL POST COVID-19

… Vijay Rustogi

You have read about my discussions with Ramesh about Helicopter Money (https://vijayrthoughts.blogspot.com/2020/04/helicopter-money-chill-pill-post-covid.html) which is basically created through the deficit financing. Helicopter Money refers to the distribution of money through various ways including direct transfer to the beneficiaries, reduction in taxes, very low or zero interest loans, creation of public assets etc.  This has been tried in China, Japan, USA and Europe.

Now  read  further …..

Next day I got a call from Ramesh.  He looks to be readying for a long discussions -

“Hi,   Vijay,  I slept with the idea of Helicopter Money last night but still  have doubts.  When I was studying Economics as a part of my curriculum, I came to know that any deficit financing will increase the inflation in the economy.  Surely the Government does not want to increase the prices post COVID-19.  Nobody wants a price increase.

I took a long breath before replying.   I said

“Hmm.   Theoretically in normal times you are correct.  Most theories have certain presumptions.  Inflation theory presumes a near perfect economy. Practically threre is always an imperfect economy.    Let us understand that inflation occurs when larger money chases fewer supplies, right.   Reverse is also true that if the supplies are less this again would  lead to inflation.”

As usual, Ramesh interrupted -

“Any attempt for higher money supply will lead to inflation. We have seen in the past that during Fiver Year Plans Government has taken recourse to deficit financing which led to the inflation.   I am for a  clear no-no for Helicopter Money”

There was a silence from both the sides for about  two seconds.  I said -

“Ramesh,  understand and visualize  the status of economy in India post COVID-19.  Many small enterprises would  be wiped out for want of money. This will mean large scale unemployment and pay cuts.   Large, medium and some of small enterprises will  survive but almost with insufficient money.  

Ramesh trying to understand and align his mind said hesitatingly-

“Cash burning rate during lockdown will deplete most of the amount with them.  With No Money or inadequate money,  existing facilities ready for production will suffer and thus supply of material will get restricted if no intervention is made.”  

I snapped  -

“Yes Ramesh you are getting the point.  Given this situation, I am afraid that even if there is no Helicopter money, the prices are going to rise due to shortage of supply.   The current mindset of business people and hoarding habits of general Indians will further aggravate the situation. So if everything is left to itself, the price rise post COVID-19 is inevitable.  In fact during lockdown period, there has been spurt in prices mainly driven by disruption in Supply Chain.  See even if it is assumed that if Government intervenes through helicopter money there would be a possibility of price rise and if it does not, still there will be a price rise.  Which situation would you prefer?

Now Ramesh has almost reconciled and he and myself were on the same wave length.  He said -

“Still it is better to put the Helicopter money in doses.  This will grease   the supply chain wheels and  increase the production in the shortest possible time.  Helicopter money to be regulated and monitored to reach all concerned particularly those having  existing facilities whether small, medium or  large,  Enterprises. But there need to be checks and balances…”

I was quite happy by noticing the change in Ramesh voice.  Almost raising my voice, I said -

“Yes that is required.  Helicopter money cannot be unlimited.  It need to be implemented through hybrid approach and in small doses watching its impact.”

“The Government is already in the process of providing relief, which most people believe is inadequate.  What I say is that the Government need not be shy and shut its door behind the traditional fiscal deficit curtain.  COVID-19 has an unprecedented negative impact on the economy which need altogether a new approach to solve.”

Almost nodding to my views, Ramesh said -

Hmmm,  Yes, I tend to agree….

I continued -

“Timely action and decision on COVID-19 has put India as number one in the race of fighting the pandemic.  I am sure India will be out from the  COVID-19 shortly  with much less casualties as compared to elsewhere in the world.  But let us not be complacent.  Post COVID-19 is going to  throw more  challenges.  We need to keep the Hunger Virus at bay and save many lives through adequate economic interventions.”

Ramesh took a deep breath.  

“Yaa you are right Vijay. I always admire your thought process.