There is a major debate raging across economists and analysts alike on one hot topic – printing money.

Printing money or put in intelligent sounding economic parlance, ‘Quantitative Easing’ (QE), is what many are saying is the only solution for India to emerge out of this pandemic morass. The virus continues to rage and as the date for the vaccine keeps on looking like the boat on the horizon – there but not quite yet there, the impact on the economy is getting bigger.

The Rs.20 lakh crore stimulus package announced earlier made not even a dent. RBI has consistently reduced rates and it might even reduce it again in August. Yet, no one is borrowing. Banks are also not lending. Demand seems to be dead except for essentials of life. Factories are running on lower capacities and people are not saving but dissaving - spending is financed by already accumulated savings, such as money in a savings account, or borrowed, as employment and getting full salaries is a huge challenge for many.

Its not as though banks do not have the money – they have more than enough liquidity. But because they need to deal with a moratorium and expect bad debt to burgeon with many borrowers having lost jobs and many SMEs and MSMEs fighting for survival or dead, they are simply not lending. Thus they prefer to park their funds with the RBI against 3.5% reverse repo rate than lend to companies or invest in Govt bonds and earn a yield of 6%.

So, the question is – what’s the point of printing money when there is already excess liquidity and banks are simply not lending? More money doesn’t mean they will lend; that money too will find its way back to the coffers of RBI rather than circulate in the economy.

When we say printing money or QE, what we mean is RBI will print money and use that money to buy Govt bonds or lend directly or pump money back into the economy via the banks. As one can see, that money might never find its way into the economy in the current circumstance.

While many economists are quick to say that this is the last resort and such extraordinary times demand such crisis management solutions, the truth is, QE will only put India deeper into the morass. Printing money always gives rise to inflation and as prices rise, yields will go down, meaning bonds will get dumped, and investors will move away from India. Given our structural fiscal deficit, rating agencies will “junk” us overnight, dealing a psychological blow. Once FIIs start moving away from Indian assets, the rupee will plunge too and that perpetuates the inflation cycle as imports get costlier. For a country like USA, printing money was not a problem as the dollar is the global reserve currency. But for us, it will be a death knell.

In the short term, we agree there will be no pressure on inflation and other perpetuating problems but do we have the will to have a short term QE? It simply will not happen.

What if the printed money is used only to directly build infrastructure and health systems? That will generate employment and boost the economy as it will lift up the sagging demand. But the benefit will be short lived as it will lead to a sharp spike in inflation, to double digits, which in turn, will turn the cycle back to high interest rates. And that will spiral into rupee depreciation and et al.

Despite what many say, QE or printing money should not even be the last resort for a country like ours. The vehicle, which is our economy, already has more than enough fuel (liquidity); we don’t need to pump in more. Instead what we need to ensure is that systemic challenges are eased, incentivize building infrastructure, provide tax incentives – the monetary outgo will be a fraction of the damage caused by printing money, with least deflation or inflation.

Printing money is indeed like letting the genie out of the lamp – there is no way to put it back inside and outside, it will wreak havoc.