There is a growing view that global central banks perpetuating a kind of ‘inequality’ ⁠— and it may be happening in India too

• Central banks around the world have been printing money to revive respective economies since the global financial crisis.
• They have doubled down on the process post the economic shock caused by the COVID-19 pandemic.
• Many economists and experts around the world have argued that the additional cash in the system has led to increased savings for the rich, and not fresh investments that create jobs.
• A similar phenomenon may be playing out in India as well.

“For 12 years, we have had austerity for many and socialism for the financiers. The result is companies look around and see people who do not have the capacity to buy new, expensive stuff. So they don’t invest in it. So they take the money that the state prints and they go to the stock exchange and buy back their own shares. It’s wasted energy that boosts inequality and creates stagnation for the many,” Yanis Varoufakis, the finance minister of Greece till July 2015, said in an interview with Al Jazeera in February this year.

This has been the strategy from global central banks in developed economies in the US and Europe ever since the financial crisis of 2008. They doubled down on the printing of money post the COVID-19 pandemic. Even India has had to do that, along with interest rate cuts, to inject money into the economy.

While it may work well as a temporary measure, staying with the plan for a long time may result in the rich getting richer by a mile, worsening the economic inequality in society. This is emerging as a concern in India too. “It became very evident after the global financial crisis that no amount of liquidity is leading to actual growth that the, you know, effectively, monetary policy, has become the useless kind of stimulant,” said Palanivel Thiaga Rajan, the finance minister of Tamil Nadu, who earlier worked at Lehman Brothers before it went belly up, said citing an unusual rise in bank deposits while stock markets are near record highs.


Simply put, central banks around the world have been printing money hoping that it would jumpstart economies. But the wealthy who are saving more by way of cheaper capital and loans are not necessarily setting up factories or creating jobs, not as much as any one had expected. Instead, they are investing it in financial assets, which grow further when more money floats around in the system.

This claim has been backed by recent data from a Credit Suisse report on Global Wealth. The total wealth grew by 7.4% and wealth per adult grew by 6%, globally. All in all, the world created fewer assets -- proving the theory that financial stimulus converts into financial assets. Financial assets per adult gained 2% in 2020 in India, while non-financial assets fell 8.4%, according to the report.

Table: The pandemic is changing the household wealth across the world


Source: Credit Suisse

Varfoukis, too, has said that 4% interest rates did the trick in the 1950s and 1960s and near zero interest rates in 2009, but both won’t anymore. “Whatever quantity of money he (US President Joe Biden) pumps into the US economy, he will fail unless he does what is necessary to lift the spending power of those who have next to none: a decent minimum wage, compulsory collective bargaining, and direct unconditional payments,” he said.

“No matter how much you pump and no matter how many quantitative easing bond buying programmes and curve-flattening and twists and all the stuff you do, the money money ends up in the hands of people who don't do what you want them to do ⁠— which is invest in jobs and growth and real assets and and production. And you know, it ends up driving up asset prices all over the world,” said Thiagarajan, speaking to Business Insider at the MSME Exchange, a virtual event dedicated to small businesses.

A vicious cycle

While the government is doling out cheap loans in the wake of the pandemic, the repayment capacity for the small businesses may be affected by this unequal recovery.

The average net worth of an Indian fell by 3.7% during the same period. Neither the country is richer after all the spending, nor is the average Indian. “If we are seeing a K-shaped recovery, wherein the larger corporates have become bigger because they could endure the pain in the first two quarters and then could have a concentrated market. They are sitting with huge savings, partly because they cut on their labour costs and other investments. The corporate savings have increased last year,” said Madhavi Arora, lead economist at Edelweiss.

Widening inequality can have serious social implications including strife. The growing influence of radical parties, protectionist sentiments like demand for protecting jobs for locals (in a state or a country), anger against immigrants, are attributed to the worsening income gap by many international economists.

“Pandemics can set off a vicious cycle of economic despair, inequality, and social unrest. The past major pandemics led to a significant increase in social unrest in the medium term, by reducing growth and increasing inequality. Higher social unrest, in turn, is associated with lower growth, which worsens inequality, forming a vicious cycle,” say IMF economists Tahsin Saadi Sedik and Rui Xu.

Thiaga Rajan argues that the solution lies in fiscal stimulus and not just printing more money. Good examples of such policies would include the production-linked incentives announced by the Indian government. “In fact, our minister has written a letter which has a line that these schemes should have been announced seven years ago when you announced the Make in India campaign. Because these could have really given a genuine push to make anything. But anyway, for some reason you have announced it under this package now,” said Jayesh Ranjan, the Information Technology (IT) secretary of the Telangana government.

The US is now going to reverse this trend by starting to hike interest rates as inflation is expected to start biting sooner than later. If cheaper credit increases money supply and boosts prices, hiking interest rates is expected to have the exact opposite effect.

However, in India, the RBI is wary of taking the step as it believes that the inflation in India, particularly in prices of essential commodities is transitory. Simply put, the RBI believes they will cool down sooner than later.

More importantly, the monetary policy committee in India is afraid that if it tried to contain inflation, it might scuttle the economic recovery post the pandemic. It may not be an easy decision, but the conversation around possible causes and remedies against the widening inequality is becoming necessary with each passing day.

The counter

Those in favour of such easy monetary policy have argued that these policies are necessary, especially during the times of crises.

“These criticisms generally fail to cite the reason why accommodative monetary policies were deployed in the first place: to avoid a depression, and then to support the recovery. The alternative scenario would have had markedly worse consequences for employment and inequality. Many more jobs would have been lost. And these jobs benefit all, including the young and low-skilled households which suffer from higher and more cyclical unemployment,” Augustin Carstens of the Bank of International Settlements said in a speech about a month ago.

But even this paper does not dispute the fact that, “Inequality is part of the environment in which monetary policy is set, and central bankers have to reflect it in their decisions.” The paper says that the best that a central banker can do is to keep the economy on an even keel while it is the job of the government “to reduce inequality through direct fiscal and structural policies.”

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