Editorial 1 : A wider viewfinder
Introduction: Three major events this week draw attention to the expanding Indian diplomatic footprint.
What are these major events?
- One is the annual Raisina Dialogue, hosted this week by the Observer Research Foundation and the Ministry of External Affairs, which brings together ministers, officials, scholars, and policy researchers from across the world to promote an India-centred global agenda.
- The other is the biennial Multilateral Naval Exercise (Milan) in the Bay of Bengal that attracts naval leaders from far and wide for professional exchanges on maritime issues.
- A less visible but equally important event is a gathering of top intelligence officials from like-minded countries on the margins of the Raisina Dialogue.
- For India, the emerging “intelligence diplomacy” could be as consequential as the “discourse diplomacy” of the Raisina Dialogue and the “naval diplomacy” of the Milan exercises.
The emergence of international conferences
- As the volume of international engagements dramatically expanded in the 21st century, there has been a rapid growth in the size of the global communities interested in international commercial, political, technological and military affairs.
- This has translated into a proliferation of think tanks and media outlets discussing foreign and security outlets.
- The rise of the international conference circuit on foreign and security policy issues is part of this process.
- For example, the Aspen Security Forum, the Munich Security Conference, and the Shangri-La Dialogue focus on American, European, and Asian security issues.
- The deepening military crises worldwide, the new stresses on the global economic order and the return of great power rivalry have created new risks to global peace and prosperity.
- They have raised the value of the forums that facilitate valuable exchange of notes among national security professionals.
New Delhi’s initiatives in public diplomacy
- Over the last decade, Delhi has taken to this arena with some vigour.
- Communication with foreign media, academia, and civil society to influence perceptions has always been part of statecraft. India is no exception.
- The Foreign Office’s External Publicity (XP) Division and its embassies have long pursued these outreach activities.
- The business chambers — CII and FICCI — have been at the forefront of creating these networks since the economic reforms began at the turn of the 1990s.
- What we have seen in the last decade is the intensification of this outreach through conference diplomacy.
1. International Conferences
- Within eight years of its launch in 2016, Raisina Dialogue has become a “must-go” event for the global strategic community interested in India.
- The MEA also supports an annual Global Technology Summit organised by Carnegie India that has become a major international forum to discuss issues at the intersection of technology, policy, and geopolitics.
- Among the other MEA conferences are the Pune International Centre’s annual Asia Economic Dialogue and the India Foundation’s Indian Ocean Dialogue.
- South Block’s traditional suspicion of the Track-Two conversations has been replaced by a recognition that discourse diplomacy sets narratives and creates transnational networks that bring together serving officials, business leaders, scholars, analysts, consultants, and the media.
2. Naval Diplomacy through Milan exercise
- The Milan exercise is part of a much older naval diplomacy.
- Navies have always been flexible instruments for sovereigns in power projection and diplomacy. In India, the navy was the first service to take to active military diplomacy in the reform era.
- By nature, internationalist in its outlook, the Indian Navy pushed to end ingrained isolationist sentiment in Delhi’s defence establishment.
- The annual Malabar exercises with the US and the multilateral Milan exercises were among the first initiatives of the Indian Navy in the early 1990s.
- Today, they together showcase India’s new strategic salience in the Indo-Pacific.
- “Milan” began as a modest “Indian Ocean Panchayat” to bring the Bay of Bengal navies to reflect together on regional maritime security.
- Four countries (Indonesia, Singapore, Sri Lanka, and Thailand) joined India in the 1995 Milan exercises in the Andaman and Nicobar Islands waters.
- It has become bigger with each iteration.
- In the 2022 edition, 39 countries participated. Fifty countries are expected to participate this year.
3. Intelligence Diplomacy
- Although barely visible in the public domain, the intelligence agencies are an essential part of the national security establishment along with the diplomatic community and the armed forces.
- As the first line of defence against internal and external threats, intelligence has been a critical part of statecraft since ancient times.
- The role of intelligence in national security has grown significantly in recent years thanks to the rise of international terrorism, the growth of cross-border criminal networks, renewed economic competition, the increasing need to protect intellectual property, the return of great power rivalry, and the impact of new technologies that are reshaping the domestic and global dynamics of an interconnected international society.
- Along with the new importance of intelligence in national security has come the idea of “intelligence diplomacy”.
- At its simplest, “intelligence diplomacy” is about sharing information with allied governments and their security agencies.
- For example, USA’s intelligence sharing among the “five eyes” group.
- But, as it looks beyond its traditional alliances to deal with emerging challenges, which are global and demanding, the US is pursuing a wider range of partnerships; intelligence cooperation has become an important element of this strategy.
- For India, too, “intelligence diplomacy” has become critical amidst the expanding scale and scope of its security challenges.
- The regular exchanges between the Indian agencies and their counterparts from like-minded countries on the margins of the Raisina Dialogue underline Delhi’s shift from the isolationism of the later Cold War decades to building productive intelligence partnerships today.
Conclusion: Delhi’s intelligence diplomacy aligns with India’s current strategy of building regional and global coalitions. It is also an important part of modernising India’s spying agencies — the Intelligence Bureau and its many offspring — which date back to the late 19th century.
Editorial 2 : The puzzle of monetary policy
Introduction: Recently released data reaffirms that inflation in India is much less of a problem now than it was a year ago, in part, thanks to the monetary policy stance of the RBI. But what could be the right policy going forward is yet to be decided by the policymakers.
What has been the state of inflation for the past three years?
- Over the past three years, India experienced high and persistent inflation.
- Between April 2021 and September 2022, the wholesale price index (WPI) inflation averaged 13 percent, the highest in more than a decade, triggered by the pandemic disruptions and the Russia-Ukraine war.
- Surges in wholesale prices normally suggest “inflation in the pipeline” and indeed, they soon translated into high retail inflation.
- During the first three calendar quarters of 2022, consumer price index (CPI) inflation averaged 7 per cent.
- Even excluding the rise in food and fuel prices, core inflation still hovered above 6 per cent for nearly every month from May 2021 to March 2023.
- The persistence of core price pressures implied that high inflation had become embedded in the system.
- It seemed as if inflation had become the Achilles heel of the Indian economy’s recovery from the pandemic.
The change in inflation from 2023 onwards
- Starting April 2023, wholesale price inflation turned negative.
- According to the latest data, headline CPI inflation fell to 5.1 per cent in January 2024, the lowest in three months.
- With this, inflation has now been within the RBI’s tolerance band of 2 to 6 per cent for five consecutive months.
- Even more striking, core inflation came down to only 3.6 per cent in January, its lowest rate since the start of the pandemic.
- While there is still some way to go before the target of 4 per cent can be achieved on a sustained basis, it now seems much closer than it did two years ago.
How did inflation come under control?
- This remarkable achievement can clearly be attributed to two factors: RBI’s dogged pursuit of a tight monetary policy and the softening of commodity prices.
- However, going forward, the conduct of monetary policy might get complicated owing to a set of puzzles.
How does RBI control inflation through monetary policy?
- When the RBI pursues contractionary monetary policy, it gets transmitted to the rest of the economy through financial intermediaries such as the banking sector.
- In response to the RBI’s hikes in the policy repo rate, banks promptly raise their lending rates and eventually, their deposit rates.
- The rise in the bank lending rate increases the cost of borrowing.
- As households and businesses borrow less, they also spend less which in turn weakens demand.
- Additionally, as deposit rates go up, households find it more attractive to deposit their savings in the banks, rather than spending it in the shops.
- As a result, both consumption and investment start slowing.
- And as aggregate demand starts falling, prices start coming down, assuming that there are no disruptions on the supply side.
- In other words, monetary tightening operates by weakening demand, thereby slowing down both GDP growth and inflation.
Why does core inflation become the target of any monetary policy?
- A standard way for economists to assess the success of monetary policy is by looking at core inflation.
- If core (that is, underlying) inflation is close to the target, it suggests that monetary policy is doing its job of controlling demand, notwithstanding any temporary deviations caused by flare-ups in food or commodity prices.
- Between May 2022 and April 2023, the RBI raised the policy repo rate by 250 basis points.
- Since then, it has held the repo rate constant at 6.5 per cent.
- In response, the weighted average lending rate in the banking sector has gone up by less than 200 basis points while the average deposit rate has gone up by more than 200 basis points.
- Even though the transmission remains incomplete, the resultant decline in demand seems to have started softening prices.
- This is evident from the decline in core inflation in recent months and from the RBI’s latest forecast, which shows that CPI inflation will come down to 4.5 percent in 2024-25, much closer to the target.
The growth-inflation conundrum for policymakers
- The story however gets confusing if we look at the RBI’s GDP growth forecast.
- The economy is expected to grow at 7 percent in 2024-25 amidst a slowing global economy, implying that domestic demand will be quite strong.
- This raises a set of puzzling questions: If indeed monetary policy is slowing demand down and cooling off inflation, how can GDP growth continue to be high?
- Alternatively, if demand will somehow be strong next year, then why would inflation continue to fall?
- The recent MPC statements are silent on this.
- In particular, they do not mention the lagged impact of tight monetary policy on the growth outlook.
- This seems like an important omission especially since the passthrough is not yet complete and will most likely continue to work through the system over the next few months, thereby further dampening demand.
- Given that the legal mandate of the inflation targeting framework is “price stability with an eye on growth”, these puzzles need to be resolved before the RBI can figure out the appropriate stance of monetary policy.
Conclusion: MPC statements are silent on the impact of tight policy on the growth outlook. This raises questions on the trajectory of policy.