India has the power to finance its own deficit

Duvvuri Subbarao argues (Opinion, April 23) that in regards to combating the oncoming and continuing Covid-19-induced recession, India should “commit to a pre-determined amount of additional borrowing and to reversing the action once the crisis is over”.

It is noted that in this crisis, it is necessary for countries to boost their borrowing to counteract the stagnation of their economies, but being an emerging market that India is, it can be risky to take on additional debt with the rupee being relatively unattractive in the global currency market.

I believe that Mr Subbarao overly underestimates the power India retains due to its level of monetary sovereignty.

India is the sole issuer of the rupee, it taxes its citizens in rupees, and it doesn’t fix the value of the rupee to any foreign currency. However, India’s main problem is that it takes on debt denominated in US dollars, Japanese yen, and euros, despite having $470bn in foreign currency reserves.

This problem is common to emerging markets, but in the case of a global pandemic, the conventional thinking about debt accumulation under the assumption of stable economic conditions must not apply.

If India can leverage an expanded fiscal package to protect its economy and its people’s livelihoods, the benefits of its increased deficit will outweigh any potential risk of inflation or currency depreciation. The function of a deficit is more important than its level, and this is especially true in dire economic situations. India has the power to finance its own deficit to meet the demands of this crisis without sacrificing its post-crisis financial credibility.

Tucker Root

Denison University,

Granville, OH, US

Letter: A cash handout is not the way to help India’s poorest

In your editorial (“How to help the poorest through the lockdowns”, May 3), you argue that India should help its migrant workers by implementing a temporary universal basic income, unconditionally transferring cash using its Aadhaar biometric ID system. While this would provide short-term liquidity to everyone, it will fail to address the structural weaknesses that have been laid bare by the pandemic.

To avoid hunger, millions of informal workers, without any savings or social safety net, are fleeing the cities to go back to the countryside. India does not have the infrastructure to provide any form of targeted cash assistance to its poor. The Modi government should use this opportunity to move forward, as opposed to “restore normality”, and correct the structural weaknesses that have left out India’s 450m informal workers.

India should lean on its National Rural Employment Guarantee Act to give cash and food assistance, as well as medical supplies to NREGA’s 250m workers. NREGA has helped formalise India’s informal rural workers, creating a social safety net by providing a 100 days per year job guarantee and unemployment benefits. The government should expand NREGA to workers in urban areas. This will help India build a database of all informal workers who need cash assistance the most. These workers can also help expand Covid-19 testing, tracing and isolation capabilities so we can start reopening the economy.

Structural fractures have allowed India’s informal economy to collapse. Instead of handing out cash to everyone, the Modi government needs to use NREGA to assist the workers who have been hit the hardest.

Manan Ganeriwala

Denison University

Granville, OH, US

Letter: Root causes of EM debt crisis deserve attention

Colby Smith and Robin Wigglesworth (FT Big Read, May 13) explained the legal challenges facing emerging markets as they prepare to face a combination of debt defaults and restructuring as a result of Covid-19. However, the authors fail to acknowledge the underlying causes of this type of sovereign default. All the countries mentioned in the article have a low degree of monetary sovereignty due to the large debt denominated in foreign currencies. A monetarily sovereign country that issues its own currency, collects taxes in its currency, only issues debt denominated in that same currency, and floats its exchange rate, cannot become insolvent.

As highlighted by modern monetary theorists Fadhel Kaboub and Ndongo Samba Sylla, the Covid-19 crisis has laid bare the structural deficiencies that emerging markets suffer from: lack of food and energy sovereignty, and heavy reliance on low value-added exports leading to structural trade deficits, downward pressure on the exchange rate, and rising external debt.

Tourism, extractive industries and FDI and export-driven growth are the band aid policies that have repeatedly led to sovereign debt defaults. Restructuring sovereign debt is simply another that will continue to serve the interest of creditors, much to the detriment of the long-term resilience of emerging markets. Without investing in food and energy sovereignty (at a minimum) to fix these structural deficiencies, emerging markets will be trapped in this endless sovereign debt cycle with no way out.

Christopher Nakon

Cleveland, OH, US