📰 Serious issue if 3 crore ration cards were cancelled, says Supreme Court
The Centre had earlier said that reports suggest that the deaths were not due to starvation.
•The Supreme Court on Wednesday said it was a “very serious” matter if the Centre has really cancelled around three crore ration cards, including those of tribals and the poor, solely because they could not be biometrically linked with Aadhaar.
•A Bench led by Chief Justice of India Sharad A. Bobde asked the Centre to respond to allegation made in a petition by Koili Devi, represented by senior advocate Colin Gonsalves, that such cancellations had led to starvation deaths across the country.
•“The insistence on Aadhar and biometric authentication had led to the cancellation of nearly four crore ration cards in the country according to the Union of India. The Union of India casually gives an explanation that these cancelled cards were bogus. The real reason is that the technological system based on iris identification, thumb prints, non-possession of Aadhaar, non-functioning of the internet in rural and remote areas, etc, led to largescale cancellation of ration cards without notice to the family concerned,” a report submitted by the petitioner side said.
•Speaking to The Hindu, Mr. Gonsalves said the “petition is based on reports that an estimate of roughly two to four crore ration cards have been cancelled in the country without prior notice to the beneficiaries”.
•Right to food, which the ration card symbolised, cannot be curbed or cancelled because of lack of Aadhaar.
Investigation sought
•Koili Devi’s 11-year-old daughter, Santhoshi Kumari, is allegedly a victim of hunger death in Jharkhand in 2017. She said the family's ration card was cancelled due to non-linkage with Aadhaar. She has sought an independent investigation into the starvation deaths, restoration of the cancelled ration cards and compensation for the death of her daughter.
•Mr. Gonsalves said the government’s continued emphasis on Aadhaar was unfortunate as the Supreme Court had laid down in clear terms that “no insistence on Aadhaar can be done for statutory entitlements”.
•“Tribals either do not have Aadhaar cards or the identification does not work in tribal and rural areas. Because of this reliance on Aadhaar cards, can you imagine three crore cards are gone...” Mr. Gonsalves submitted
•“Three crore cards have gone?” Chief Justice asked incredulously.
•“Yes, starvation deaths are taking place. Three crores ration cards have gone... I can show the Union of India’s declaration. It is an announcement of the Prime Minister,” Mr. Gonsalves responded.
•He argued that the States were in a denial mode, blaming the deaths on diarrhoea and malaria. “In fact, anything but lack of food. This cruel exercise deprived millions of Indians living below the poverty line of food and led to starvation deaths in Jharkhand, U.P., Odisha, Karnataka, M.P., Maharashtra, Bihar, Chhattisgarh, West Bengal, Andhra Pradesh and other States,” the petitioner’s side said in a report prepared after going through the responses obtained from the States.
‘Statements misplaced’
•Additional Solicitor General Aman Lekhi said the statements made by the petitioner side were misplaced. Issuance of ration card was not dependent on the Aadhaar card. Alternative mechanisms were in place. Besides, the issuance of ration cards was primarily the responsibility of the State governments.
•Mr. Lekhi said the petitioners should ideally move the respective High Court, rather than file an omnibus petition in the apex court. He said the petitioners had come directly to the apex court without raising their issue with the grievance redressal mechanism under the National Food Security Act.
•“We are persuaded to consider this case because of their [petitioners’] statement that ration cards have been cancelled... That is a very serious matter,” Chief Justice Bobde said in response to Mr. Lekhi’s submissions for the Centre.
•Even as the government highlighted the redressal mechanism within the Food Security Act as the right place to go, the petitioner side countered in its report to the court that “not a single State has appointed independent nodal officers or district grievance redressal officer under the Act”.
•“All the States have mechanically granted additional designations to existing officers. In many cases, the officers given additional designations are from the Food Supply Department, and they are the main persons responsible for corruption in the food distribution system,” the report said.
•It referred to the directions imposed by the Supreme Court in the Swaraj Abhiyan cases on the implementation of the Food Security Act, which included social audits, framing of rules and setting up vigilance committees.
•The Hunger Watch Report of the Right to Food Campaign in 2020 characterised the hunger situation in India as “grave”. India ranks 94 out of 107 countries in the Global Hunger Index 2020 and is in the ‘Serious Hunger Category’.
Placing PSBs in the hands of private players is not a panacea for India’s banking sector woes
•In the recent Budget session, the Union government announced its intent to privatise Public Sector Banks (PSBs). While improving efficiency has been cited as the reason for this move, it is not clear whether privatisation brings efficiency or reduces associated risks. Around the world, innumerable private banks have failed, thus challenging the notion that only private banks are efficient. Similarly, if private enterprises are the epitome of efficiency, why do private corporate entities have such large volumes of NPAs?
•Bank nationalisation ushered in a revolution for India’s banking sector. Before nationalisation, barring the State Bank of India, most banks were privately owned and they largely benefited the rich and the powerful. The nationalisation of 14 private banks in 1969, followed by six more in 1980, transformed the banking sector, created jobs, extended credit to the agriculture sector and benefited the poor. Areas that had so far been neglected, including agriculture, employment-generating productive activities, poverty alleviation plans, rural development, health, education, exports, infrastructure, women’s empowerment, small scale and medium industry, and small and micro industries, became priority sectors for these banks.
Equitable growth
•The move also helped in promoting more equitable regional growth, and this is evident from RBI data. There were only 1,833 bank branches in rural areas in the country in 1969, which increased to 33,004 by 1995 and continued to grow over the next decades. Banking services also reduced the dependence on moneylenders in rural regions. Nationalised banking improved the working conditions of employees in the banking sector, as the state ensured higher wages, security of services, and other fringe benefits.
•As an institution, PSBs are vehicles of the Indian economy’s growth and development, and they have become the trustees of people’s savings and confidence. The PSBs played a huge role in making the country self-sufficient by supporting the green, blue, and dairy revolutions. They have also contributed significantly to infrastructural development.
•Public sector banks in India are currently earning considerable operating profits, to the tune of ₹1,74,390 crore in 2019-20 and ₹1,49,603 crore in 2018-19. Why is the government then, instead of strengthening PSBs, starving them of the required capital and human resources through disinvestment and the proposed privatisation? Placing such a huge network of bank branches and the infrastructure and assets in the hands of private enterprises or corporates may turn out to be an irrational move. It could lead to denial of convenient and economical banking services to the common man; the risks of monopoly and cartelisation may only complicate the issue.
Stringent laws
•Furthermore, in the context of privatisation and efficiency, it is unfair to blame PSBs alone for the alarming rise of NPAs. On the contrary, stringent measures are required to recover large corporate stressed assets, which is a key concern for the entire banking sector. This must include strong recovery laws and taking criminal action against wilful defaulters. So far, the government has not exhibited a firm willingness to implement these measures. Wilful default by large corporate borrowers and subsequent recovery haircuts, imposed through the ill-conceived Insolvency and Bankruptcy Code, has resulted in a heap of write-offs, putting a big dent on the balance sheets of PSBs. This has not only affected the profitability of the banks, but has also become an excuse to allege inefficiency.
•There is an urgent and imperative need to bring in a suitable statutory framework to consider wilful defaults on bank loans a “criminal offence”. A system to examine top executives of PSBs across the country will also help in improving accountability. But privatisation of PSBs is not a definitive panacea for the problems of the banking sector in India.
📰 Pulling India’s democracy back from the brink
Suggestions that its democratic credentials have been tarnished merit a serious, thoughtful and respectful response
•Governments, like the citizens that live under their influence, come in a dizzying array of types, challenging simplistic efforts of classification. In spite of all this variation, what remains constant is this: throughout history, governments wield considerably more power over the governed than the other way around. Actually that is a gross understatement. The vast majority of governments that have ever existed have enjoyed essentially unfettered power over their subjects. Of course, some rulers have been more enlightened and benign than others and grasped the insight that ruling is easier when one’s right to do so is viewed as legitimate than simply through coercion; but even such philosopher-kings were not above the exercise of arbitrary power when necessary. And these were the exceptions: most elsewhere, power was maintained and known by its iron fist.
Institutional checks
•Happily, human progress has made this description of state-society relations sound quite anachronistic, even though fundamental alterations in the balance of power between governors and the governed are the happenings of contemporary history. The first institutional check on sovereign power is arguably the establishment of the English Parliament in what British historians term the Glorious Revolution. Tired of unending wars that it was asked to fund through people and treasure, an emboldened nobility asserted its right to be consulted by the monarch in matters of war and the purse. But for the non-Lords of the British Isles, precious little changed. That was the late 1600s, and while the French and American Revolutions of a century later spawned political theory of the highest order proclaiming the inalienable freedoms of all men created equal, the truth is that the era of colonialism, and continued exclusion of women, as well as racial and religious minorities, meant that it was not until the mid-1950s that the revolution only dreamt about for millennia before became reality.
•Finally, leaders were expected to return periodically to face the judgement of the governed through universal suffrage elections, and their power in office was constrained by a constitution whose guardian was an independent judiciary, and whose actions were scrutinised and made public by an empowered press charged with a sacred responsibility to speak truth to power on behalf of the powerless.
•In the heady days that followed the Second World War, with colonial rule beating the retreat, the spirit of national self-determination heralded the proliferation of newly independent countries around the world. The ideological battleground of the Cold War forced these new states to choose between democracy, the sine qua non of which was competitive elections, and its many alternatives, the latter often justified by the fig leaf of communist ideology. But a mere few decades later, the collapse of the Soviet Union and the start of a unipolar American era led many erstwhile dictatorships to announce elections. As one commentator infamously stated, it was the end of history and liberal democracy had won the day.
Pillars of governance
•What the democratic triumphalists failed to anticipate was that elections, while vital to the exercise of democracy, are just one leg of the governance stool. The others, equally necessary for the system to hold steady, are the strength and independence of the other public institutions of the state whose fealty was to the Constitution rather than any elected government; and the vibrancy and vitality of the press who served as the people’s representatives, asking questions and uncovering truths that made the powerful squirm, and that levelled the playing field for citizens charged with rendering judgement on incumbents at the next election. But the electoral autocrat, as academic observers labelled them, understood this architecture all too well, and initiated a sustained, often violent, assault on these very institutions, even arguing brazenly that the counter-majoritarian impulses of constitutionalism were in fact anti-democratic! It is a playbook honed and refined by Vladimir Putin (Russia), Viktor Orbán (Hungary), Recep Tayyip Erdoğan (Turkey) — and incompetently (thankfully) attempted by Donald Trump (the U.S.).
Global scrutiny and indices
•It is against this background that the kerfuffle about western academic institutions that generate and publish annual indices of democracy around the world must be understood. Freedom House (based in Washington DC) and the Varieties of Democracy project (V-DEM, based in Gothenburg, Sweden) are two of the more well-regarded efforts to conceptualise and measure the state of democracy globally each year.
•Their methodologies and indicators are transparently public, and the data sets they provide are widely analysed by researchers worldwide. Like most academic work, their efforts are destined to be ignored by most, but the announcement last month that both indices had independently decided to downgrade India’s democratic rating has set off a firestorm of indignant protest by many who view it as a frontal assault on the current government. India’s External Affairs Minister S. Jaishankar dismissed these ratings as irrelevant certificates issued by self-appointed arbiters in the West for which India had little use. Fair enough, though a cynic might point out that the government is all too glad to trumpet positive recognition by western organisations that laud India’s improving investment environment, for instance. Some certificates are more useful than others.
•What drove the decision to reduce India’s score on these indices? Both Freedom House and V-Dem utilise explicitly multi-dimensional schema that combine many different indicators using, in V-Dem’s case particularly, quite sophisticated statistical techniques. Their methods have been repeatedly peer-reviewed and validated by thousands of studies that establish a very high degree of correlation with other academic efforts to measure democracy. Their key facet is a conception of democracy that is holistic, and that gives considerable weight to the freedom of the press and the independence of the judicial branch. Concerns about the undermining of these institutional checks-and-balances on the power of the Indian state led both institutions to reduce India’s score on their index. (Freedom House also reduced its score for a Trump-battered United States, for those wondering.) Nor are such concerns limited to India as a web search for the phrase ‘democratic backsliding’ will reveal. Democracy has been in retreat globally for a while.
•Is India less “free” than it was a decade ago? Maybe; maybe not, but it is disingenuous to pretend that the mere perception that it might be so does not have negative consequences for the country’s ambitions to be a fully paid-up member of the Quad, or of the D-10 (a moniker for a group of 10 leading democracies), both of which western clubs require a certificate attesting an applicant’s democratic credentials for admission. One need not agree with the scoring to recognise its import. To do otherwise is to crib about whether the setting or grading of an examination was fair as if this could alter an adverse university admission decision it caused — at a certain point, it is besides the point.
Shun the preferred gallery
•How can India reverse the damage caused? First, the government must resist peevish responses. An international audience increasingly savvy to misinformation sees through the copy-paste Twitter campaigns of pliant celebrities and pro-government bots. India’s democratic credentials are intrinsic to its identity and its greatest source of legitimacy internationally. The suggestion that these credentials have been tarnished merits a serious, thoughtful, and respectful response, rather than a clever quip that plays to one’s preferred gallery but does nothing to assuage one’s critics. Second, the courts and press must own up to their part in this debacle. Institutional independence is a hard-won resource to be husbanded and invested wisely by their custodians. Doing so strengthens them and the government with whom they serve the people. Third, strong democracy requires a strong Opposition, as much as it does an incumbent secure enough to face criticism without getting defensive. Without an Opposition to provide voters a viable alternative, the most powerful check on power devised by human society — elections — loses its power, and with it, so does democracy.
•For almost 75 years, India’s democratic exceptionalism in the developing world has been a source of genuine pride for its citizens, and made it a beacon for others seeking to learn from its enviable record of holding free and fair elections at all levels of society. But concerns caused by increasing attacks on the press and the erosion of judicial autonomy undermine that image. It is that reality, not the publishing of an academic index, to which the government and the nation must respond.
📰 Allaying concerns: On public trust and vaccination programmes
Public trust is a key ingredient to successful vaccination programmes
•A little over 392 million doses of vaccine have been administered globally, according to the Bloomberg Vaccine Tracker, with India accounting for around 9% of them. In the last week, there have been a flurry of reports from Europe, of blood clots developing in a very small fraction of those vaccinated and leading to a cascade of European countries announcing a temporary halt to their vaccination programmes involving the AstraZeneca (AZ) vaccine. WHO and the European Medicines Agency have underlined that there is no causal link between vaccines and the occurrence of such clots. In fact, there are less than 40 such occurrences reported so far, and that is much below the background of about 1,000 to 2,000 blood clots every single day in the general population, say studies based on the U.S. population. These organisations advocate that the ongoing vaccination drives continue, even accelerate, as the rate of vaccination is not keeping pace with what is required to control the pandemic. However, there are good reasons too for the countries to have called for a temporary halt. The AZ, Pfizer and Moderna vaccines have been released under emergency use authorisations, meaning that the entire profile of risks associated with them have not been thoroughly studied. History is replete with instances of vaccines that have been taken off even years after approval after a slight increase in untoward complications. As of now, the risk of dying from serious COVID-19 far outweighs that from vaccine reactions and it is such a calculation that weighs on the minds of regulators before approving vaccines.
•Unlike drugs administered to the sick, vaccines have a higher bar of proving themselves safe as they are given to the healthy. Regulators of all countries rely on the experiences of others, as exemplified in India alone where it was AZ trials in the United Kingdom that paved the way for approval in India. Therefore, a warning in one country must immediately activate the sensors in another. India has a long experience with vaccinations as well as expertise in evaluating risk; however, transparency and prompt data sharing, thereby building public trust, is not one of its strong suits. This was evidenced by the approval of vaccines in spite of scant efficacy data. There is almost no information by the National Committee on Adverse Events Following Immunisation on the nature of serious adverse events following immunisation. This is in contrast to the frequent analyses shared by organisations such as the U.S. Centers for Disease Control and Prevention on adverse events. Public trust is a key ingredient to successful vaccination programmes and this can be only earned by the government’s zealous attention to allaying concerns.
📰 Aligning a missile deal with destination Manila
India’s emergence as a regional security provider will depend on the way it handles the BrahMos sale to the Philippines
•Earlier this month, India and the Philippines signed the “Implementing Arrangement” for “procurement of defense material and equipment procurement”. This agreement lays the groundwork for sales of defence systems such as the highly anticipated export of the BrahMos cruise missile, through the government-to-government route. As the Secretary, Philippine Department of National Defense publicly acknowledges, the archipelagic country’s intention of purchasing the missile, and a potential export deal for India, moves one step closer to reality. This deal will be of great significance for multiple reasons, and even though the procurement process is progressing steadfastly, there are many challenges that lie ahead.
Features of the system
•Research and development of the BrahMos cruise missile systems began in the late 1990s. Manufactured by BrahMos Aerospace Limited, a joint venture between the Defence Research and Development Organisation and the joint stock company Military Industrial Consortium NPO Mashinostroyenia (earlier known as the Federal State Unitary Enterprise NPOM of Russia), this is the first supersonic cruise missile to enter service. Capable of attaining a speed of Mach 2.8 (almost three times the speed of sound), it has a range of at least 290 km (a new version can reach up to 400km).
•Travelling with such velocity means that it would be difficult for air defence systems utilising surface-to-air missiles to intercept the BrahMos while making it easier for it to target and neutralise advanced fighter jets such as the Chinese J-20 fighter aircraft moving at less than Mach 2. Even so, efforts to increase the speed and range of the missile in its next iterations are under way, with a goal of achieving hypersonic speeds (at or above Mach 5) and a maximum range of 1,500 km.
•Early naval and land variants of the BrahMos were inducted into service by the Indian Navy in 2005 and the Indian Army in 2007. Subsequently, an air-launched variant was successfully tested in November 2017 by the Indian Air Force from its Sukhoi-30MKI fighter jet, giving the missile a dominating presence in all three domains.
Export as a goal
•These advanced and powerful capabilities of the BrahMos not only augment the strength of the Indian military but make it a highly desirable product for other countries to procure as well. Exporting the system, hence, has been on the agenda for more than a decade. Doing so would boost the credibility of India as a defence exporter, help it meet the target of $5 billion in defence exports by 2025, and elevate its stature as a regional superpower. Countries such as Vietnam, the Philippines, Indonesia, the United Arab Emirates, Argentina, Brazil, and South Africa have so far shown an interest in acquiring the systems.
Geo-political impact
•The implications of the Philippines becoming the first country to import the BrahMos would be wide-ranging and consequential in the Indo-Pacific. To begin with, it would caution China, with whom the Philippines has been engaged in a territorial conflict in the South China Sea, and act as a deterrent to Beijing’s aggressive posturing. Indeed, this is why China has been wary of the Association of Southeast Asian Nations (ASEAN) countries acquiring defence systems such as the BrahMos. Further, taking lessons, other nations threatened by Chinese belligerence may come forward to induct the BrahMos into their arsenal, thereby boosting India’s economic, soft, and hard power profile in the region and providing the Indo-Pacific with a strong and dependable anchor with which they can protect their sovereignty and territory.
Possible hurdles
•The Government of India has prioritised making the country ‘Atmanirbhar’ in the defence manufacturing sector and establishing itself as a major defence exporter. The Philippines, on the other hand, has decided to buy the BrahMos out of geopolitical and strategic necessities. Nonetheless, two major roadblocks still remain in the Manila deal.
•The first is the Countering America’s Adversaries Through Sanctions Act (CAATSA), which aims to sanction individuals and entities who engage in a “significant transaction” with a listed entity. So far, Turkey and China have been penalised under CAATSA for purchasing the S-400 Triumf air defense systems from Russia. NPO Mashinostroyenia is one of the listed Russian entities. And since 65% of the components, including the ramjet engine and radar seeker used in the BrahMos, are reportedly provided by NPO Mashinostroyenia, the export of the missile systems may attract sanctions. Remarkably, the United States, of which India is a major defence partner, has maintained ambiguity over whether it will introduce sanctions over India’s acquisition of the S-400, licensed production of the AK-203 assault rifle, and export of the BrahMos. Hesitant of being sanctioned themselves, countries may shy away from purchasing the BrahMos. However, there is an excellent case for India to receive a waiver from CAATSA, especially vis-à-vis the BrahMos that can help contain a confrontational China.
•The second issue pertains to financing. A regiment of the BrahMos, including a mobile command post, four missile-launcher vehicles, several missile carriers, and 90 missiles, reportedly costs around $275.77 million (₹2,000 crore). Ravaged by the COVID-19 pandemic, many countries which are interested in the BrahMos would find it difficult to purchase it. The cost of the systems has been a major hurdle in moving forward to reach a deal with the Philippines. To remedy this, India has offered a $100 million line of credit, and the Philippines is thinking of purchasing just one battery of the BrahMos, consisting of three missile launchers with two to three missile tubes each.
•With India determined to develop itself as a hub of defence manufacturing, how it handles the sale of the BrahMos would be an important factor in its potential emergence as a net provider of regional security in the Indo-Pacific.
📰 A Gandhian route in Myanmar
The swelling civil resistance in the country serves as a reminder of the strength of collective non-violence
•Aung San Suu Kyi was awarded the Nobel Peace Prize in 1991 while she was still under house arrest in Myanmar. In a lecture in 2012, she described the award as a recognition that “the oppressed and the isolated in Burma were also a part of the world, that they were recognising the oneness of humanity”. It is ironical that 30 years later, the Nobel laureate, who turned a blind eye to the suffering of the Rohingya Muslims in her country, is now back under house arrest imposed by the military junta in Myanmar.
•Several weeks of non-violent demonstrations and a deadly crackdown have roiled the nation since the military coup d’état on February 1, which brought back full military reign following several years of a quasi-electoral rule. However, the most important part about the coup is not the house arrest of Ms. Suu Kyi, but the unstoppable non-violent civil resistance of the Myanmar population. It is as if once again, the Myanmarese have come to regard the Gandhian concept of non-violence as a radically shared social contract that bolsters the intervention of the ethical in politics. Despite the security forces’ harsh methods against protesters, the anti-coup sentiments in Myanmar have so far been non-violent and peaceful.
•Mahatma Gandhi chose a spinning wheel as a symbol for his idea of non-violence. It represented two messages: the wheel was the main instrument to protest against India’s growing industrialism, and it was also a symbol of resistance to the British-made clothes that had replaced Indian handmade clothes. In the United States, Martin Luther King turned to the symbol of the “American Dream” as a hope of social justice and equity for every member of the American society. Today, the three-fingered salute that was adopted by activists in Thailand has become a strong symbol of resistance for democracy in Myanmar.
A moral strength
•The growing interest among the new generation of Myanmar activists in Gandhian non-violence is not a new phenomenon. For a long time, during her previous house arrest, Ms. Suu Kyi’s Buddhist spirituality provided her with a moral strength in the direction of non-violent resistance. “Non-violence means positive action. You have to work for whatever you want. You don’t just sit there doing nothing and hope to get what you want. It just means that the methods you use are not violent ones. Some people think that non-violence is passiveness. It’s not so,” she said in an interview many years ago.
•Her message is in tune with that of peaceful protesters who defy fear. As such, there are many similarities with Ms. Suu Kyi’s argument, which underlined the fact that “it is not power that corrupts but fear. Fear of losing power corrupts those who wield it and fear of the scourge of power corrupts those who are subject to it”. Ms. Suu Kyi saw the non-violent revolution in Myanmar as an attempt by the people to act as the Buddha taught. In Buddhism, she argued, “each man has in him the potential” to realise this. But “under despotic rule, man is valued least, as a faceless, mindless — and helpless — mass to be manipulated at will”.
The quest for democracy
•Today, at the centre of Myanmar’s protest movement, the core quality is inner strength. It is the spiritual steadiness that comes from the belief that non-violent resistance is right, even if it does not bring down the military junta immediately. This is what the late Czech dissident and artist, Václav Havel, called “the power of the powerless”. What the young Myanmar protesters represent is that the powerless do have power, and that power can be manipulated through non-violent means.
•Let us also not forget that the protesters’ quest for democracy not only presents serious challenges to the authority of the military power in Myanmar and its legitimacy, but also questions the democratic nature of all those global powers that put into question the authenticity of the non-violent resistance of the Myanmar population.
•Gandhi associated politics with ethics. He once wrote: “I have always derived my politics from ethics or religion and my strength is also derived by my deriving my politics from ethics. It is also because I swear by ethics and religion that I find myself in politics. A person who is a lover of his country is bound to take a lively interest in politics.”
•The future of Myanmar is not up to the military, it is up to those who follow the example of Gandhi in the streets of Yangon and Mandalay. The military and dictatorial powers in the country are trying to exorcise this spectre, but the winds of Gandhian non-violence are once again blowing strong and are unlikely to dissipate soon.
📰 Re-evaluating inflation targeting
The evidence and trends for inflation in India go against the benefits claimed for the policy
•As the term of the original agreement between the Centre and the Reserve Bank of India (RBI) on inflation targeting ends on March 31, evaluations of this aspect of monetary policy have begun to emerge in the public domain. Two points have been made: first, that the inflation rate has remained within the prescribed band of 2% to 6% since 2016, when inflation targeting was introduced, and secondly that the RBI has succeeded in anchoring inflationary expectations. In fact, the lower inflation rate has been seen as the outcome of the latter. Our long-term research on inflation in India suggests that the evidence, however, is not conclusive on the efficacy claimed for inflation targeting.
•Though macroeconomic policy may not be of wide interest, a rudimentary understanding of what is meant by inflation targeting may be useful. Inflation targeting is only one of a set of imagined inflation control policies. Globally, inflation control became de rigueur after the high inflation that followed the oil shock in the early 1970s. In fact, well before inflation targeting was advanced, Milton Friedman had brought inflation control to the centre stage through his relentless highlighting of the ever-lurking threat of inflation.
•On the other hand, in India, policymakers had engaged with inflation since the 1950s, when plans to industrialise met the challenge of inflation. Thus, scepticism about inflation targeting as a strategy of inflation control does not imply that inflation control is not a legitimate objective of economic policy. While the monetarist Friedman had prescribed money-supply targeting as the means to control inflation, inflation targeting prescribes the use of the interest rate to target inflation. So, really, what is new about inflation targeting is only the instrument chosen, not the goal itself. There is, however, the vague suggestion that it is likely to be more effective than the monetarist approach, as the instrument, the policy interest rate, is under the direct control of the central bank.
Logical vulnerabilities
•However, what has remained hidden in public discourse is the economic model that underlies inflation targeting. This model revolves around the proposition that inflation reflects “overheating”, or economic activity at a level greater than the “natural” level of output, having been taken there by central banks that have kept interest rates too low, at a level lower than the “natural” rate of interest. From this follows the recommendation that the cure to inflation is to raise the rate of interest set by the central bank, the so-called policy rate, which in India is termed ‘repo’ rate. A feature of this theory of inflation is that its central construct, the natural level of output, is unobservable. This makes it next to impossible to verify the explanation, which is also self-referential. The exponent starts out by stating that the inflation rate is rising as the output is higher than its natural level, but when asked how it has been concluded that output is actually higher, the response is “for inflation is rising”. Understanding phenomena on the basis of faith is not scientific. Despite this logical vulnerability, inflation targeting is a reality in that it is the Centre’s stated policy of inflation control.
•Our work demonstrates that the model that underlies inflation targeting is not statistically validated for Indian data. But instead of going into specifics, we scrutinise in this article whether recent history supports the claim that inflation targeting has been successful on the grounds that the inflation rate has remained within the band agreed to between the government and the RBI, and whether it has been achieved by “anchoring inflation expectations”.
•Inflation in India entered the prescribed band of 2% to 6% two years before inflation targeting was adopted in 2016-17. In fact, inflation had fallen steadily since 2011-12, halving by 2015-16. This by itself suggests that there is a mechanism driving inflation other than what is imagined in inflation targeting.
•The view is further strengthened by the finding that the decline in inflation over the five years concerned was led by the relative price of food. While falling food-price inflation per se does not rule out the possibility that expectations of inflation may have fallen in this period, it would be difficult to explain why expectations would have fallen so sharply even in the absence of inflation targeting, considered essential for anchoring expectations. Recall that the adoption of the policy in 2016 came after inflation had entered the prescribed band. RBI data on household expectations show them remaining well above 6% for twelve years up to 2020. Finally, it is the flaring up of both inflation and inflation expectations after March 2020, when the COVID-19 lockdown was announced, that makes it difficult to believe the thesis of an “overheating” economy. Why did expectations soar if they had been anchored through inflation targeting? On the other hand, we can explain the flaring up of inflation in terms of food prices, as supply chains were disrupted due to the lockdown.
•In conclusion, for the sake of argument, let us assume that over the past five years, inflation in India has been controlled via inflation targeting. It may then be asked what the benefits of this have been. We can think of five variables of interest in this context, namely growth, private investment, exports, non-performing assets (NPAs) of commercial banks, and employment.
Conflicting patterns
•The economy’s trend rate of growth actually began to decline after 2010-11. So, inflation targeting could not have caused it, but it is of interest that sharply falling inflation could do nothing to revive growth, belying the proposition that low inflation is conducive to growth.
•For investment, there is reason to believe that higher interest rates, the toolkit for inflation targeting, may have been harmful. The swing in the real interest rate of over 5 percentage points in 2013-14 was powered further in 2016, when inflation targeting was adopted, and could have contributed to a declining private investment rate. It is interesting that policy entrepreneurs assert that the benefits of low inflation may be considerable for private investment.
•We need to say nothing about exports and employment, except that they had fared poorly since inflation targeting became official.
•Finally, NPAs. It has long been recognised that a central bank focusing on inflation may lose control of financial stability. NPAs have grown since 2016, and the cases of IL&FS, PMC Bank, PNB and YES Bank suggest that poor management and malfeasance in the financial sector could escape scrutiny when the central bank hunkers down to inflation targeting.
•We end with two points. Inflation control will always be relevant but there is no conclusive evidence that the policy has worked in India. Secondly, the presumed benefits of low inflation are yet to surface. So, we should guard against the possibility that inflation targeting may deliver the worst of all worlds, i.e., raising interest rates, with all negative consequences, without lowering inflation. Lastly, assuming that the decline in inflation in India is due to inflation targeting would stand in the way of acknowledging the source, the vagaries of the price of food.
