Basis for ‘monetary insanity’ in India

A rare meeting of minds between India’s Left and Right on a point of economics should alarm those who belong to neither. The two sides are tossing out similar — and similarly absurd — ideas.
Before they make PM  Narendra Modi’s government do something silly and harmful (such as the overnight ban on 86% of currency notes in 2016), both camps should acquaint themselves with rudiments of Modern Monetary Theory (MMT).
It postulates that inflation — and not debts or deficits — is the only real constraint on what a modern government not yoked to the gold standard can afford. Even for those who aren’t MMT cheerleaders, its basic
contention is worth remembering: A money-printing sovereign that issues debt in its own currency can’t run out of funds the same way as a household or a firm.
Pro-labour academics, activists and social workers who think it’s morally justified to expropriate private property to support India’s pandemic-flattened economy should know that such extreme measures are unwarranted. The proposal from the fiscally conservative, pro-business side to use people’s gold as collateral to raise emergency
public resources is also indefensible.
An extended lockdown, still-rising infections and an underwhelming fiscal response are causing the nation of 1.3 billion people to lurch towards self-defeating economic nationalism. In other ways, too, the crisis of lives and livelihoods is clouding rational thought. An otherwise well-meaning memorandum by a group of economists and trade unionists asked the government to treat all cash, property, bonds and real estate held by Indian citizens or in the country as national resources during the Covid-19 crisis. Amid trenchant criticism, the idea was quickly dropped.
But an equally bizarre proposal from the other end of the political spectrum, more closely aligned with the Modi government, is far from dead. An article in the Business Standard last month said that to print money to revive the economy, authorities are contemplating using gold held by citizens or a part of the official $500 billion in foreign-exchange reserves. When Soumya Kanti Ghosh, the chief economist at the State Bank of India, the country’s largest lender, sought to deflate the trial balloon in an op-ed, it became clear that the idea was gaining traction.
Indians own 25,000 tons of gold, roughly one-eighth of the metal ever mined. Households usually keep gold in the form of jewellery, not bars, and can pledge it against loans. Why would they sell family heirlooms and wedding gifts to the central bank to watch them melt in a government furnace? The idea of using foreign reserves as collateral is more perplexing.
Those are already the Reserve Bank of India’s assets, matched by liabilities — money — on the other side of its balance sheet. To create more rupees via this route, the RBI will have to buy more dollars from banks and give them newly minted currency.

—Bloomberg