Can Quantitative Easing Solve The Covid 19 Induced Economic Crisis?

Prof. (Dr.) Sriharsha Reddy

COVID 19 can be considered as an unprecedented and unwanted pandemic to take place in the history of mankind. The virus has spread like wildfire across more than 200 countries, starting from December last year. Around 20 lakh people have been affected to date globally, with morbidity cases amounting to over one lakh.

All the affected countries are fighting the deadly virus with regular tracing, testing, and treating the infected patients, and has also been active in spreading awareness about the virus and the importance of social distancing and personal hygiene. Due to the excessive spread of the virus, many countries have been compelled to initiate partial to complete lockdown, ensuing shutting down of businesses and factories, stopping trains and flights, and restrictions daily work for most people.

The government of India has declared complete lockdown in the entire country since 24th March 2020 and has been relatively successful in limiting the spread of the virus till mid of April. However, such lockdown has taken a toll on India’s GDP, which according to World Bank, has been around 1.5%-2.8%, and according to Fitch ratings has been at 2% for the 2021 financial year.

This GDP is considered to be the lowest in the last three decades, and both the central and the state governments are working day and night to handle this crisis. They are leaving no stones unturned to mobilize all the forces they have in their hand to meet the needs of the 135 crore Indians.

To aid in such a tense situation, Sri K Chandra Shekar Rao, Chief Minister of Telangana, has provided the valuable suggestion of Quantitative Easing to the Government of India. Quantitative easing points at releasing around Rs 10 lakh crores (5% of India’s GDP of 203 lakh crores) to handle the economic crisis resulting from COVID 19 pandemic.

Therefore, it is important to understand what is Quantitative Easing (QE), its advantages, and its shortcomings.

What is Quantitative Easing?

Central banks use Quantitative easing as a monetary policy initiative to buy Corporate bonds/Government bonds to generate liquidity in the market. This can help in boosting the economy from recession. Central banks use the money to buy bonds from financial institutions, banks and use this money to increase credit activity. These financial institutions can end the money to the government, individual households and businesses at a lower interest rate, and as a result, both income and consumption increases.When the economy moves into the recovery phase, the central bank then sells these bonds and destroy the received cash. As a result, no extra cash is created in the long term.

Why will Central Bank use QE?

Central Bank uses QE in recessionary conditions thatpersist for a prolonged period. They normally use it in attempts to recover the economy. They use Monetary policy tools like Statutory Liquidity Ratio, lowering cash reserve ratio, Repo rates, Bank rates, etc. In general, QE is considered to be the last resort when other economic policies fail. It was employed by the European Central Bank in 2014 during the Euro Debt Crisis and by the federal reserve bank in 2008 during the global financial crisis.

Benefits of QE

QE supports industries during a recession, boosts growth in the economy, increases the confidence of the customers, and maintains the existing employments in all companies. It also enhanced export due to the fall in currency value and increased money supply.

Shortcomings of QE

QE may produce lower returns on savings resulting from lower interest rates, cause higher inflation and related conditions. It can increase the costs pertaining to imports due to the decrease in currency value. Moreover, the central banks might not be able to sell the bonds,which can hamper the country’s borrowing chances.

What India can do to handle COVID 19 induced economic crisis

TO revive the economy, RBI, on coordination with banks and the government, may create liquidity by purchasing bonds. However, QE only works with monetary stimulus and coordinated fiscal action. It will not work if the banks reject the proposal to lend or the businesses do not borrow due to a lack of customer’s demands. For example, RBI has lowered interest rates for a record six times in a row. Still, economic upliftment was not possible due to increasing bad loans lend out by banks and a decrease in income in rural India.

First of all, policymakers must focus on providing facilities to the Food Corporation of India and state governments to spend minimum support price in procuring agricultural products from the farmers. This approach will uplift the income in rural India. Then they must encourage manufacturing companies and businesses related to the healthcare systems.

They should also provide necessary and continuous support to other sectors to maintain employment in these sectors. Banks should be supported and encouraged to lend for production, development, and consumption-related activities of businesses, governments, and households. Lastly, RBI will have to use QE to support the government in combating COVID 19 and the economic crisis related to it.

Prof. (Dr.) Sriharsha Reddy

https://www.imthyderabad.edu.in/faculty/sriharsha-reddy

Join the official group of IMT Hyderabad and stay updated!

Read Next