Editorial 1. Reading RBI’s policy review
Recent Context:
- Recently, The Monetary Policy Committee (MPC) voted 4-2 to increase the policy repo rate by 25 basis points to 6.5 per cent. While this increase in the interest rate is lower than the earlier aggressive hikes of 35-50 bps, the. raised interest rates further to bring inflation back to the target level of 4%.
- Monetary policy essentially deals with the supply and cost (interest rates) of money in an economy.
- The RBI’s MPC meets every two months to assess the state of monetary activities, and may tweak the repo rate (the interest rate at which the RBI lends to commercial banks) in a manner that reduces price fluctuations in the economy while keeping the inflation rate (the rate at which the general price level in the economy grows) at a reasonable level.
A significant review of Monetary Policy: The latest monetary policy review was significant for a variety of reasons.
- One, it came just after the presentation of the Union Budget, which is the most important fiscal policy document of the year.
- Two, it came at a time when Indian markets are roiled by uncertainty in the wake of the Hindenburg Research allegations against the Adani Group and the resultant upheaval in Adani stock prices.
- Three, central banks around the world are currently either slowing down the pace of interest rate increases, or even considering halting monetary tightening.
- Lastly, this was the last review of the current financial year (2022-23) and as such provided a good opportunity to understand how the RBI saw the Indian economy panning out in the next financial year (2023-24) the Budget for which has just been presented.
RBI’s announcement
- There are two aspects to any monetary policy: the decision on repo rate, and the “stance” of the policy.
- While changes to the repo rate affect the broader economy in terms of whether loans for homes, cars, or factories will be costlier or cheaper,
- the policy stance opens a window into how members of the MPC see the inflation and economic growth situation
- Since retail inflation has been outside RBI’s comfort zone of 2% to 6% for 10 of the past 12 months, the stance has been focussed on “withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”.
- On the repo rate, the RBI announced a 25-basis point increase, smaller than recent hikes (50 and 35 bps), which signalled the MPC’s view that inflation has moderated faster than anticipated.
- It also signalled that India is possibly close to the end of the current cycle of interest rate hikes that began in May last year after retail inflation hit an 8-year high of almost 8% in April 2022.
- “Consumer price inflation in India moved below the upper tolerance level (read 6%) during November-December 2022, driven by a strong decline in prices of vegetables,” RBI Governor Shaktikanta Das said.
MPC not unanimous on hike
- The decision to increase the repo rate was made by a 4-2 majority in the six-member MPC; government-nominated members Ashima Goyal and Jayanth Varma voted against the hike.
- There was, indeed, a view that the RBI should refrain from raising rates because inflation is slowing faster than expected. Many had argued that the RBI should wait to understand how earlier rate hikes had affected the economy, and leave some space for economic growth.
- On stance, too, there were expectations that the RBI would move to a “neutral” stance — suggesting that it no longer wants to expressly raise interest rates and would like to wait and watch how the situation unfolds.
- However, here again the MPC decided in favour of maintaining the status quo.
- Simply put, the RBI came across as more “hawkish” (read more concerned about high inflation than about the moderation in economic growth) than many expected
Why hawkish stance
- The answer may lie in the RBI’s outlook for India’s economic growth and inflation in the coming financial year. RBI expects that India’s gross domestic product (GDP) will grow by 6.4% in FY24 — however, the growth rate will slow down in each quarter through the year.
- “…Real GDP growth for 2023-24 is projected at 6.4 per cent with Q1 at 7.8 per cent; Q2 at 6.2 per cent; Q3 at 6.0 per cent; and Q4 at 5.8 per cent,” the MPC’s policy statement said.
- At 6.4%, India’s growth rate would slow marginally from the 7% it is expected to achieve in the current financial year and the 8.7% that it achieved in the previous financial year. But most economists who expected the RBI to pause interest rate hikes are of the view that GDP growth will barely cross 6%, if at all.
- While for RBI, India’s GDP growth remains sufficiently robust to not become priority number one, its outlook on inflation is higher than the expectation on the street.
- The RBI expects retail inflation to be 5.3% through 2023-24 — and to not fall below 5% in any of the four quarters.
Conclusion:
- A specific worry for RBI continues to be the core inflation rate (or the rate of inflation when prices of food and fuel are taken out of the calculation).
- Core inflation is hovering around 6%, and signifies that high food and fuel prices have now seeped into the broader economy.
- Bringing down high core inflation typically takes more time than controlling headline inflation because food and fuel prices often come down just as sharply as they go up.
Editorial 2. The fine print in the Indo-US pact, iCET
Recent Context:
- Recently, Initiative on Critical and Emerging Technology (iCET) initiative was launched by Indian Prime Minister Narendra Modi and U.S. President Joe Biden in May 2022 with the goal “to elevate and expand” Indo-U.S. “strategic technology partnership and defense industrial cooperation between the governments, businesses, and academic institutions” of the two countries
- It is seen in the light of President Biden’s 2021 undertaking to transfer multiple advanced technologies, including submarine nuclear propulsion to Australia, it starkly highlights the absence of any significant offer of high tech by the US to India, despite bilateral ties, growing steadily in warmth and closeness.
How does US helped China in technological growth in the past?
- In his 2019 book, The Hundred Year Marathon, Michael Pillsbury, a foreign policy strategist, who has held positions in the US administration and Senate, says,
- “…not only has China’s rise happened right under our noses, but also the US and the West have helped the Chinese accomplish their goals from the beginning… For decades, the US government freely handed over sensitive information, technology, military know-how and expert advice to China.”
- the dramatic ascent of a prosperous, technologically advanced and militaristic China — leaving India far behind in its wake — owes much to the close multidimensional cooperation extended to it by the US since the 1980s
India-USA areas of cooperation in the field of defence, security and technology : There has been significant accord and agreement between Indo-US cooperation in the security and technology domains.
- Next Steps in Strategic Partnership” in 2004; “Defence Framework Agreement” in 2005:
- the pathbreaking “Indo-US Civil Nuclear Agreement” in 2008;
- launching of the “Defence Technology and Trade Initiative” in 2012;
- accord of “Major Defence Partner” status by US Congress in 2016; and institution of “2+2 talks” in 2018.
- The signing of the fourth and last of the key “foundational agreements” in 2020 was supposed to have eliminated the final impediment to closer security cooperation.
- However, after nearly two decades of this pretentious “pas de deux”, all that the Indo-US “strategic partnership” had delivered was $22 billion worth of military hardware, purchased by India via the foreign military sales programme.
- In a determined bid at the highest level to address this state of stasis, a communique following the May 2022 Biden-Modi quadrilateral summit in Tokyo announced “the launch of a US-India Initiative on Critical and Emerging Technologies spearheaded by the National Security Councils (NSC) of the two countries”.
- Following this, a team of top Indian scientists, including the heads of ISRO and DRDO, recently held the first formal talks in Washington with their US counterparts; both teams being led by respective NSAs.
iCET could become a “game changer”
- Pitched at the exalted level of the two NSCs, the iCET could become a “game changer” in catalysing Indo-US technology cooperation by persuading the US to lift existing export control restrictions, and encouraging the private sector of both countries to cooperate in sensitive sectors.
- The most important outcome, however, would be to dispel the cloud of mistrust that has hung over this relationship and to demonstrate a mutual commitment to investing in advanced technologies, such as quantum computing, AI and space, as well as the critical field of semiconductor design and manufacture.
- While many of these emerging technologies have huge future potential, both in the civil sector and the security domain, there are other areas — less esoteric but equally important — in which India’s defence industrial complex has been struggling for decades and on which iCET must focus urgently.
iCET promises a long overdue transformation, four aspects demand wariness on India’s part. (Conclusion)
- First, even though ownership of technology in the US may lie with the private sector, the US Arms Export Control Act not only requires clearances from the Departments of State and Defence for ToT but also imposes certain restrictions on the recipient state
- Second, an unstated but significant, long-term objective of the iCET is, surely, to wean India off its dependency on Russian military hardware. This is likely to face stiff resistance on various grounds from Moscow as well as from domestic quarters, but national interest must prevail.
- Over the past 60 years, neither the quality of Soviet/Russian hardware nor the product support has ever matched that of its western counterparts, and the disruption caused by the Russia-Ukraine conflict will further aggravate the situation. The time has come for India to break free of Russia’s apron strings and regain “strategic autonomy” in international affairs.
- Third, while India is in dire need of technology, the US industry remains firmly focused on trade. India will, therefore, need to leverage its considerable purchases in the arms, energy, civil aviation, nuclear and other sectors in a holistic manner to extract technology from the US.
- Finally, we must bear in mind that merely switching from Russian to American military hardware will be a case of “jumping from the frying pan into the fire”. Atmanirbharta must remain our ultimate aim.