Editorial 1 : Surge and Fall
Context: Even as outlook on inflation improves, RBI must continue to remain vigilant
Introduction
- Last Friday, the minutes of the monetary policy committee meeting held in October were released. These reaffirm the committee members’ focus on bringing down inflation to the central bank’s target of 4 per cent.
- Inflation in India had surged in the months of July and August, staying well above the upper threshold of the Reserve Bank of India’s inflation targeting framework.
Inflation
- Inflation is defined as a sustained increase in the general level of prices for goods and services.
- It is measured as an annual percentage increase as reported in the Consumer Price Index (CPI), generally prepared on a monthly basis by the Bureau of Labor Statistics (BLS).
- As inflation rises, purchasing power decreases. But that's not all. Fixed-asset values are affected, companies adjust their pricing of goods and services, financial markets react and there is an impact on the composition of investment portfolios.
General causes of Inflation
- There may be several factors that drive inflation.
- They include an increase in production costs (cost-push inflation), an increase in the demand for goods and services (demand-pull inflation), and fiscal policy.
- With cost-push inflation, demand for goods and services remains the same while supply dwindles because of higher costs. In demand-pull inflation, consumer confidence is high, which can result in lower supply and, thus, higher prices. Central banks may also expand their montary policies by injecting more money into the economy, lowering interest rates, and increasing spending.
Food inflation: Recent scenario
- However, in both its August and October meetings, the MPC had chosen to look through this surge, on grounds that it was driven largely by soaring food, especially vegetable prices, which were transitory in nature.
- The September data, which was released after the MPC’s October meeting, showed that food prices have indeed corrected sharply, vindicating the committee’s decision to maintain status quo.
Impact of Vegetables
- In July, the consumer food price index had surged to 11.5 per cent, up from 4.55 per cent the month before, as vegetable prices soared.
- However, in the weeks and months thereafter, prices, especially of tomatoes, corrected just as sharply as they had risen.
- Vegetable inflation that had touched 37.3 per cent in July fell to 3.4 per cent in September as fresh supplies entered the market. Vegetables have a weight of 15.5 per cent in the food basket and exercise a disproportionate impact on the trajectory of inflation.
- As per a recent report by Crisil, vegetable prices have been trending upwards in recent years. Between 2019-20 and 2022-23, vegetable inflation averaged 5.7 per cent, up from 0 per cent between 2015-16 and 2018-19.
- Alongside, the frequency of the price spikes has also increased. As per the report, in the past 100 months, vegetable inflation was above 7 per cent in 35 months, and above 10 per cent in 30 months.
- The volatility in vegetable prices is in fact much more than that in overall food prices. The report identifies supply-demand mismatches, ups and downs in production, as triggers for these trends.
Looking forward
- The RBI’s latest forecast also indicates that the worst is over. Inflation is projected to fall from 6.4 per cent in the second quarter (July-September) to 5.6 per cent in the third quarter (October-December). However, the MPC must continue to remain vigilant.
- As the RBI Governor noted in his statement, policy must take action to “prevent any spillover from food and fuel price shocks to the underlying inflation trends”. The guiding objective of the committee must be to ensure price stability.
Editorial 2 : World in flux, where India stands
Context: The future will tell if it is at the Centre of global affairs or stuck between two camps.
Introduction
- In his last book, The India Way, S Jaishankar wrote, “It is time for us to engage America, manage China, cultivate Europe, reassure Russia, bring Japan into play, draw neighbors in, extend the neighborhood and expand traditional constituencies of support.” This strategy, aimed at maximizing India’s national interest the realpolitik way is much easier to implement if the world remains multipolar.
Recent developments and Chinese attitude
- Recent developments, including the BRICS and G20 summits, suggest otherwise. The international scene is becoming more and more bipolar, largely because of the Chinese attitude.
- The two summits form a sequence which may lead to a new era. In Johannesburg, Beijing could have its way by including six new members into the BRICS grouping. China had already done something similar in the early 2010s when it had lobbied for the addition of South Africa to what was till then the BRIC.
- By doing so, Beijing made the IBSA, comprising India, Brazil and South Africa, redundant. Why should these three countries, which claimed to represent the three largest democracies of the three largest continents, continue to meet separately now that they were all part of the same grouping?
- The 2013 IBSA meeting is still due and India and Brazil have lost an instrument that could have helped them to speak in the name of the Global South.
Global South and growing bipolarization
- The Global South is precisely what the new “BRICS plus” formula claims to embody. This new grouping may be the crucible of a larger coalition intended to offer alternatives to existing multilateral architectures.
- The fact that Xi Jinping skipped the G20 summit in New Delhi fits in well in this scenario. Several countries belong to both groupings, but the two most important leaders of the former, Putin and Xi, did not take part in the latter, as if the grouping in which they invested the most was not that one, but one that had been expanded a few weeks before.
- This sign of a growing bipolarization of the international scene is naturally strengthened by the rapprochement between Moscow and China.
Chindia like cooperation
- How far is India’s plurilateralism — to use Jaishankar’s word — compatible with this new dynamic? In his book, Jaishankar envisaged a “Chindia”-like cooperation (“the ability of India and China to work together could determine the Asian century”) and considered that India could be at the Centre of international affairs by taking part in China-led as well as US-led groupings: “If India drove the revived Quad arrangement, it also took membership of the Shanghai Cooperation Organisation. A longstanding trilateral with Russia and China now coexists with one involving the US and Japan”.
- But is such an equidistant situation tenable if China is not giving due respect to India in minilaterals such as the BRICS and the SCO?
Delhi getting closer to west
- In this context, India may need to take sides and get closer to the West. This trend has already been obvious for quite some time, as evident from India’s role in the Quad, the making of trilaterals like the India/France/UAE and India/France/Australia groupings, as well as many joint manoeuvres between the Indian navy and several western powers.
- In the margins of the G20 meeting, this rapprochement manifested itself in the announcement of a transport project to link India to Europe via Saudi Arabia, the UAE, Jordan, and Israel.
- This project, which would help boost trade, deliver energy resources and improve digital connectivity, fits in the plan that had already been announced in the 2021 G7 meeting under the name “Build Back Better World”.
- It should also benefit from the EU project known as the Global Gateway. Both are clearly responses to the Chinese Belt and Road Initiative that India refused to join. By being part of this new project, Delhi is getting closer to the West.