India’s economy was doing comparatively well before the coronavirus pandemic shook the nation. Not only did it negatively impact the physical well-being of the citizens, but it also made way for the worst economic contraction of India’s GDP in decades. Strict widespread lockdowns forced the imbalance of the demand-supply equilibrium, pushing the economy into a technical recession. Although the current restrictions are not as strict as before, the economic crisis’s obstacle remains without a viable solution.
Unexpected Problems Require Unconventional Solutions.
In India’s quest to find a viable tool to boost the economy, a term named ‘Helicopter Money’ is making headlines. The policy of Helicopter Money was one of the suggestions provided last year by Mr. Chandrashaker, the Chief Minister of Telangana. He had proposed that RBI adopt this concept to assist State Governments in sailing through the torrent and kickstart economic activity.
Decoding the Concept of Helicopter Money
Milton Friedman, a Nobel-winning economist, initially coined the term in 1969 in his book “The Optimum Quantity of Money.” Friedman then explained the term by using a metaphor where a helicopter flies over the community and drops $1000 in bills from the sky. The money is picked up hastily by the community members, understanding the event to be unique. The event was his take on an unconventional monetary policy that aims to pump money into a struggling economy. An alternative mechanism for Quantitative Easing (QE), he promoted the idea to counter rising inflation.
How does the concept of Helicopter Money Works?
The idea of Helicopter Money aims at increasing the spending of the common citizen by providing them with liquid cash, without the liability to pay it back. Under this unconventional policy, the Reserve Bank of India, through the Government, would extend a non-repayable money transfer to infuse liquidity in the economy (the more money people have, the more they will spend). Since the money is not a loan, It boosts spending and economic growth more effectively than quantitative easing. Thus, increasing aggregate demand – the demand for goods and services, potentially eradicating the economic crisis.
Helicopter Money vs. Quantitative Easing: Are they the same thing?
Under Helicopter Money, the government directly provides funds for public expenditure with no repayment liability. However, in the case of Quantitative easing, the central bank uses the printed money to purchase long-term Government bonds to increase the supply of money. Since the supply gets higher, the cost gets lower, letting the banks lend with a lower interest rate, leaving people with more money to spend.
Why don’t economies make use of Helicopter Money?
The economists deem the concept unfeasible in promoting economic recovery as it promotes:
- Over-inflation: As the central bank can not link the money to a borrowed asset (loan), it cannot alter the interest rates to recover the pumped amount.
- Currency Devaluation: As the central bank prints more currency for supplying to the citizens, people are left to spend more on the same goods and services. Since everything starts to cost more, the currency is valued less, resulting in devaluation.
Although the concept of Helicopter money may seem the easiest way to come out of a crisis, most economists discourage its use as it can only augment the economy’s damage. There are more minor ways to counter the economic crisis. Therefore, the policymakers should decide beyond Helicopter Money to provide citizens with added liquidity and spark economic recovery amid trying times.