Helicopter Money

  • With no quick escape in sight for Covid-ravaged economies, authorities the world over are going back to the drawing board to find strategies to deal with this nightmare.
  • In India, Telangana chief minister K. Chandrashekhar Rao suggested printing of currency and called for implementing a ‘Helicopter Money’ scheme.

Key Points

  • Telengana CM urged the Centre to make RBI pump at least 5% per cent of Gross Domestic Product (GDP) which was ₹203 lakh crore.
  • At this rate, the RBI could inject ₹10 lakh crore into the economy. Otherwise, neither the Centre nor the State governments had the money to revive the economy.
  • Citing the example, he said US was releasing 2% and UK 15% GDP, in order to provide some ease to their sagging economies.

About Helicopter Money

  • Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero.
  • It is also referred to as a helicopter drop, in reference to a helicopter scattering supplies from the sky.
  • American economist Milton Friedman coined this term in 1969.

Difference with Quantitative Easing (QE)

  • Central banks use quantitative easing to increase the money supply and lower interest rates by purchasing government or other financial securities from the market to spark economic growth.
  • While, Helicopter money basically means non-repayable money transfer from the central bank to the government, central banks use QE to create money and then purchase assets using the printed money.
  • QE does not have a direct impact on the public, while helicopter money is made directly available to consumers to increase consumer spending.

Recent Example

  • If a country faces slow or no growth, it could consider a helicopter drop.
  • For example, in 2016, Japan considered using helicopter money to assist with the country’s slowing growth.
  • Financial markets showed concerned with the decision, as participants feared hyperinflation and currency devaluation.
  • So, the Bank of Japan (BoJ) opted for an alternative method to increase monetary supply.
  • This included different partnerships and purchases such as government bonds, infrastructure outlays and payments to lower-income earners.

Benefits of Helicopter Money

  • Helicopter money does not rely on increased borrowing to fuel the economy, which means that it doesn’t create more debt and interest rates can remain unchanged.
  • Generally, it boosts spending and economic growth more effectively than quantitative easing because it increases aggregate demand – the demand for goods and services – immediately.
  • While government money drops that come from debt might not boost consumer spending, due to the debt needing to be repaid, it is often thought that ‘money finance’ will stimulate the economy.

Will Helicopter Money Help Indian Economy?

  • Helicopter money refers to a last resort type of monetary stimulus strategy used to spur inflation and output to boost the economy.
  • Here the basic principle is to increase broader economic activity and pushing the inflation up by putting more money in circulation in the market.
  • As printing of money to finance deficit increases inflation and is believed to be an attempt to extract more output in an underperforming economy, it is potentially loaded with huge risks.
  • One of the primary risks associated with helicopter money is that the policy may lead to significant currency devaluation in the international foreign exchange markets.
  • The currency devaluation would be primarily attributed to the creation of more money.
  • For eg, in August 1921, Germany began to buy foreign currency with Marks at any price, but that only sped up devaluing the Mark considerably. In 1923, the Mark had lost meaning with the exchange rate of one trillion Marks to one dollar.
  • Zimbabwe too was caught in this precarious situation in the first part of this century. The facts reveal that there was a time when a 100 trillion Zimbabwe dollar bill wasn’t enough to buy a bus ticket in the country’s capital.
  • And this kind of hyperinflation scenario has gripped Venezuela right now.
  • As this helicopter money boosts inflation, increases interest rates and borrowing costs, it then becomes a dire need to print money every year to fund burgeoning deficit.
  • So, while looking at the experience of printing currency in other countries, it can easily be concluded that such a move doesn’t increase economic output in any way, it merely causes inflation.
  • And this increase in inflation is not good for economic health of the country.

Need of the Hour

  • The government or central bank could implement a version of helicopter money by spending money on tax cuts, and thereafter, the central bank would deposit money in a Treasury account.
  • Additionally, the government could issue new bonds that the central bank would purchase and hold, but the central bank would return the interest back to the government to distribute to the public.
  • Therefore, these forms of helicopter money would provide consumers with money and theoretically spark consumer spending.