Helicopter Money and Economy – How it can help tide over COVID-19 Economic Crisis
Amid rising concerns over economic crisis that has been triggered by the COVID-19 lockdown; 
Helicopter Money is one concept that is being considered by authorities world over?
On 12th April 2020, The Telangana Chief Minister Shri K.Chandrashekhar Rao has informed the press, "'Helicopter Money will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5% of funds from GDP through Quantitative Easing Policy."
Observing that there is a fall in revenues of both the state and central governments against the backdrop of the coronavirus pandemic, Rao said a policy of Quantitative Easing (QE), which is followed all over the world, is the only way to deal with the situation.He is understood to have discussed the matter with Prime Minister Shri Narendra Modi in detail. He also informed that the FRBM (Fiscal Responsibility and Budgetary Management) limit to five per cent from the existing three.
He suggested that a task force with the prime minister as chairman and cabinet ministers as members be set up to come out with an action plan on helping farmers and the policy to be implemented on the economic situation. "To counter (economic crisis) this we need a strategic economic policy. RBI should implement quantitative easing policy. This is called Helicopter Money. This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5 percent of funds from the GDP through Quantitative Easing Policy," he suggested.
One such strategy doing the rounds is 'helicopter money'. It basically means non-repayable money transfer from the central bank to the government. It seeks to goad people into spending more and thereby boost the sagging economy.This is an unconventional monetary policy tool. It involves printing money and distributing it to the public.
What is 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.
- It basically denotes a helicopter dropping money from the sky. American economist Milton Friedman coined this term in his famous “The Optimum Quantity of Money”. Friedman used the term to signify "unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump."Under such a policy, a central bank "directly increase the money supply and, via the government, distribute the new cash to the population with the aim of boosting demand and inflation."
Why is helicopter money in news now?
With the coronavirus-hit economy falling deeper and deeper into a chasm with each passing day, Telangana chief minister KC Rao today said helicopter money can help states comes out of this morass. He asked for the release of 5% funds from GDP by way of quantitative easing (QE).QE, a policy followed all over the world, is the only way to deal with the situation, Rao said. "To counter (economic crisis) this we need a strategic economic policy. RBI should implement quantitative easing policy. This is called Helicopter Money. This will facilitate the states and financial institutions to accrue funds. We can come out of the financial crisis. Release 5 percent of funds from the GDP through Quantitative Easing Policy," he suggested.
Helicopter money vs quantitative easing
Helicopter money is an unconventional alternative to quantitative easing, but both aim to boost consumer spending and increase inflation. While helicopter money increases monetary supply by distributing large amounts of currency to the public, quantitative easing increases supply by purchasing government or other financial securities to spark economic growth.
Quantitative easing also involves the use of printed money by central banks to buy government bonds. But not everyone views the money used in QE as helicopter money. It sure means printing money to monetise government deficits, but the govt has to pay back for the assets that the central bank buys.It's not the same as bond-buying by central banks "in which bank-owned assets are swapped for new central bank reserves."Helicopter money is also different from a central bank directly financing the debt of a government.
Examples of helicopter money
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.
Is Japan deploying helicopter money?
According to some analysts, the yield curve control that Japan is resorting to is basically a type of helicopter money only. That is because this strategy lets the government spend more without having to worry about bond yields jumping.BoJ, however, rejects the allegation on the basis that the "BoJ still buys bonds from the market and does not directly underwrite debt from the government, something that could undermine confidence among investors."The line, however, is blurred as BoJ buys roughly the same or bigger amount of bonds issued by the government.
Pros and cons of helicopter money
Pros 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, helicopter money 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.
Cons of helicopter money
Unlike quantitative easing, using helicopter money as a tactic is not reversible, and many argue that it’s not a feasible solution to revive the economy.
A country’s central bank sets its interest rates to reach economic growth targets. However, a helicopter drop means that a central bank cannot use interest rates to recover any costs, because the money is not linked to a borrowed asset (loan). Instead, the money is given directly to the public. This may lead to over-inflation and cause damage to the central bank’s financials.
One of the main risks associated with helicopter money is that it could lead to a significant devaluation of the currency on the foreign exchange market. As more money is printed and supply increases, the value of the domestic currency could significantly decrease. It could also discourage speculators from buying the currency as it is less likely to perform well.
How it can help RBI to revive Indian Economy from COVID-19 crisis?
Telangana Chief Minister K. Chandrashekar Rao has suggested RBI to adopt the concept of Helicopter Money to help state governments tide over the current crisis and kickstart economic activity in India.
The policy aims at putting more money into the pockets of people to nudge them to spend more money and in turn pick-up economic activity in the country. The direct impact of Helicopter Money is rise in disposable incomes of the people, increase in money supply with an intention to boost demand and inflation in the economy.
Apart from Telangana CM, Confederation of Indian Industry(CII) has also recommended a similar arrangement in which a direct cash transfer of Rs 5000/- will be made by the central government in to accounts of all adults who have annual income below Rs 5 lakhs. The industry body also recommended that the cash transfer for more vulnerable sections including senior citizens can be raised to Rs 10000/-. The body recommended this move as a one-time measure to boost demand in its action note on COVID-19 submitted to PMO.
Source: Economic Times, LiveMint &
https://www.ig.com/en/glossary-trading-terms/helicopter-money-definition