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What is direct monetization of deficit? Do you think it could be a comprehensive solution for the government to prevent the looming financial crisis? Critically examine.

Topic:  Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

6. What is direct monetization of deficit? Do you think it could be a comprehensive solution for the government to prevent the looming financial crisis? Critically examine.(250 words)

Reference:  Indian Express 

Why this question:

The article highlights that with the economy stalled; there isn’t enough money in the market for the government to borrow. It explains if it can ask the RBI to print more money and in such a case how does the process work, and what are the arguments against it.

Key demand of the question:

Explain the concept of direct monetization of deficit and present arguments for and against it.

Directive:

Critically examine – When asked to ‘Examine’, we have to look into the topic (content words) in detail, inspect it, investigate it and establish the key facts and issues related to the topic in question. While doing so we should explain why these facts and issues are important and their implications. When ‘critically’ is suffixed or prefixed to a directive, one needs to look at the good and bad of the topic and give a fair judgment.

Structure of the answer:

Introduction:

Briefly define the idea of direct monetization of deficit in the preset context.

Body:

Explain first the current scenario, discuss as to what triggers a demand for direct monetization. Discuss the scope and feasibility of “Direct” Monetization by the government for Deficit Financing as an option of the last resort. Explain if India has done this in the past. Highlight the issues involved.

Conclusion:

Conclude with what should be the way forward.