10 Feb 2024 : The Hindu Editorial

Topic 1 : Prudence prevails: On keeping monetary policy disinflationary

Context: Policymakers must continue to keep the focus on slowing price gains

Introduction

• The Monetary Policy Committee (MPC) of the Reserve Bank of India has wisely decided to continue with its goal of "ensuring that inflation progressively aligns to the target" by maintaining the status quo of benchmark interest rates and "withdrawal of accommodation."

Prioritising the battle against inflation

• With a 5-1 majority, it has committed to keeping monetary policy unambiguously disinflationary so as to anchor inflation expectations, especially at a time when ‘large and repetitive price shocks are interrupting the pace of disinflation’.
• On the rationale to leave the repo rate unchanged at 6.5% for a sixth straight meeting, Governor Shaktikanta Das observed that while domestic economic momentum remained strong, uncertainties in food prices continued to impinge on the headline inflation trajectory.
• The tangible risk that food price pressures could become more generalised and impact broader headline inflation was the main consideration, he explained.
• That the majority of the MPC was aligned in prioritising the battle against inflation needs to be seen in the backdrop of the recent trends in retail inflation.
• Headline retail inflation, which had eased from July’s 15-month peak of 7.4% to 4.87% in October, however, rebounded to a four-month high of 5.69% in December, with food price gains gauged by the Consumer Food Price Index racing ahead to 9.53%, a sizeable 292 basis points faster than October’s 6.61%.

Food inflation and Core inflation

• That the uncertainty surrounding food price gains has begun to vex policymakers is reflected in a recent RBI Bulletin article that pointedly sought to find an answer to the question, ‘Are Food Prices the ‘True’ Core of India’s Inflation?’.
• Concluding that there is enough empirical evidence to support an assertion that ‘there are times when food inflation mimics core inflation’, the officials caution that given food’s substantial share in the consumption basket, large and repeated food price shocks have the potential to ripple outward and undermine the goal of price stability by de-anchoring inflation expectations.
• The MPC’s downward revision of its projection for average retail inflation in the January-March quarter to 5.0%, 20 basis points lower than its December forecast, reflects the small comfort policymakers have taken from the improvement in rabi sowing as well as a seasonal correction in vegetable prices.
• Still, the Department of Consumer Affairs’ daily price monitoring dashboard shows the average retail price of more than two-thirds of the key food items it tracks remained higher on a year-on-year basis as on February 8.

Conclusion

• Policymakers need to stay steadfast in their resolve to durably slow price gains towards the 4% target or risk dampening consumption and thereby undermining the growth momentum.

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Topic 2 : The decline of America’s leadership

Context: Washington is failing to use its leverage in the international environment

Introduction

• The traditional strengths of America are its values platform, its military power, its pivotal position in the global financial system, and as a technology pioneer. The energetic pro-American lobby in India advocates ever-closer engagement with the United States, rejecting arguments about its diminishing influence.

Post-World War II US Influence on International System

• After the Second World War, the U.S. shaped the rules-based international system. A rules-based order is an abstract concept; in practice it was neither centred on rules nor was it entirely global.
• It was a power-based system established by the U.S. and its allies, and Washington considered itself exempt from its norms, particularly those prohibiting interference in the internal affairs of other countries.
• The American wars in Afghanistan and Iraq dissipated America’s credibility due to its emphasis on military expeditionism, evidenced by about 750 military bases in 80 countries, though Al Jazeera says the number “may be even higher as not all data is published by the Pentagon”.

Polarization and issue of legitimacy

• Actions speak louder than values, and Washington is failing to leverage its standing in the international environment, thereby empowering polarisation politically, economically and culturally.
• The U.S. withdrew from the Trans-Pacific Partnership that emphasised human rights, transparency and liberal democracy, and also from many other international obligations.
  • While it sought international dominance, domestic polarisation induced ideological separation, rendering cooperation in its two-party system non-existent.
• In the West and parts of Asia, open liberalism and globalisation made links of community, family and society brittle, with many feeling excluded from economic progress.
• Individual freedom was juxtaposed against state, society and law, and the movements of people have resulted in a backlash against immigration, feeding populist movements.
• The exercise of power is insufficient to be a dominant geopolitical player; legitimacy is also necessary. The most powerful leaders still crave legitimacy both at home and abroad.
• There is now a shift in power equations, with challenges to the legitimacy of institutions and leaderships. Mr. Trump and his supporters openly question the validity of the U.S.’s electoral system.
• American soft power, such as its entertainment industry, which is non-government and unregulated, balances some negativity, as do enduring alliances in Southeast Asia and Europe, though U.S. complicity with Israel’s violence against Palestinians has scrambled all its pre-existing policies in West Asia.

Moves by China and Russia

• The leaders of China and Russia are determined to maintain their authoritarian regimes and seek to reshape the international system, using trade, pressure and diasporic ties to obstruct the spread of western democratic values that have held sway for decades.
• In parts of Asia and Africa, western liberalism is often interpreted at worst as a smoke screen for neo-imperialism, and at best as an insensitive expression of American and European arrogance.
• And although there is no chance of dethroning the international financial settlement infrastructure soon, BRICS’ policies seem to herald a contest between local currencies and the dollar because the risks in the current dollar-centric system are unacceptably high.
• U.S.-China security and economic competition is the central issue in the world today, and will be potentially dangerous in the years to come.
• China campaigns to project power with traditional and non-traditional techniques, such as the Confucius Institutes, TikTok and gaming.
• Its prowess in high technology and geo-engineering inspire admiration, along with its programme of overseas infrastructure financing unmatched by any other country.
• Due to internal dissonance, the U.S. has failed to assume leadership in Artificial Intelligence when compared to China and the European Union, which are setting the standards.

Conclusion

• Whether or not the U.S. remains “the indispensable nation”, as former U.S. Secretary of State Madeleine Albright termed it, India should develop an advantageous relationship with America while keeping in mind its deficiencies.