Editorials/Opinions Analysis For UPSC 09 June 2022

Editorials/Opinions Analysis For UPSC 09 June 2022

Contents

1. Challenges in dealing with Indo-Pacific
2. Monetary tightening and its Impact on Growth

Challenges in Dealing With Indo-Pacific

Context

The Indo-Pacific region has been under pressure and East Asia, in particular, has had to weather repeated storms.

Relevance

GS-II: Bilateral, Regional and Global Groupings and Agreements involving India and/or affecting India’s interests.

Dimensions of the Article

• Background
• China-challenge in Indo-Pacific
• Will IPEF framework help in tackling challenges from China?
• Two facets of Indo-Pacific
• Way Forward

Background

• Recently, U.S. President Joseph Biden was on his five-day visit to Asia.
• During this visit, the new conservative South Korean government showed a willingness to expand the presence of a U.S. missile defense system in the country, which had earlier angered China.
• In Japan, the administration promised him that it was ready to do away with its long-standing 1% GDP ceiling for annual defense spending.
• Mr. Biden said at a press conference that the U.S. would intervene militarily to defend Taiwan if it came under attack from China.
• The President and members of his delegation later clarified that there is no change in the substance of American foreign policy, which is still governed by the Taiwan Relations Act.
• As per the 1979 Congressional law, the U.S. “shall provide Taiwan with arms of a defensive character” so that the region can defend itself.
• The law says nothing about the U.S. being required to step in militarily to defend Taiwan in the event of an invasion by China.

China-challenge in Indo-Pacific

• South Korea and Japan face regular nuclear and missile threats from North Korea.
• Challenge to international maritime law: China not only challenges international maritime laws in the South China Sea, but also confronts Japan over the Senkaku Islands.
• Spratly Islands dispute: Six nations, including China and Taiwan, are involved in the dispute over the Spratly Islands, which are supposedly sitting on vast reserves of oil and natural gas.
• Militarization of disputed isles: China has vigorously militarised some portions of the disputed isles, islets and coral reefs; and countries like Vietnam and the Philippines are anxious not to be left behind.

Will IPEF framework help in tackling challenges from China?

• The US has sought to deal with China by establishing an Indo-Pacific Economic Framework (IPEF) with Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam.
• Four pillars of IPEF: The IPEF will work on fine-tuning four major pillars: standards and rules for digital trade; resilient supply chains; green energy commitments; and fair trade.
• Issues of trade and tariffs: However, there is discontent that the framework does not address issues of trade and tariffs. 
• Lack of trade component: Asian partners really want is trade, they want market access.
• And the trade component of the IPEF is really lacking.

Two facets of Indo-Pacific

• Balance relations with US and China: One is that China’s neighbours would rather balance relations between Washington and Beijing.
• Extent of resistance: Second is the extent to which countries in the region will want to get on the anti-China bandwagon, economic or strategic.
• Whether it is in East, Southeast or South Asia, every country has its own unique relationship with Beijing.
• India may be a part of the Quad, but is quite mindful that it is the only country in the group that shares a land border with China.
• South Korea and Japan are part of a strong American security/strategic partnership but will be keen on maintaining their economic status with China.
• This is also true for the Association of South East Asian Nations.

Way Forward

Given the complex nature of the threats and the challenges the Indo-Pacific faces, drawing up any strategy remains to be an uphill task.

Source – The Hindu

Monetary Tightening And Its Impact on Growth

Context

A rate hike in the monetary policy committee’s June meeting was a foregone conclusion after the spike in inflation and an off-cycle surprise interest rate hike on May 4.

Relevance

GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

Dimensions of the Article

• Reasons fast forwarding of Interest Rate Hike
• How US Fed’s actions affect India?
• Inflation and its Impact
• Growth Prospects
• Monetary Policy Actions
• Way Forward

Reasons fast forwarding of Interest Rate Hike

• Broad based inflation: A confluence of factors has pushed inflation higher and made it persistent and broad-based. 
• Policy rates are still negative: Even with this hike, the repo rate, the signaling tool for bank interest rates, is still below pre-pandemic levels.
• The real policy rate (repo rate less expected inflation) remains negative and has some distance to cover before it reaches positive territory — where the RBI would like to see it.
• Lag in effect: Monetary policy impacts growth, and thereafter, inflation with a lag.
• To control inflation, the RBI needed to act faster by front loading rate hikes.
• Elevated inflation expectations: The risk of inflation expectations getting unmoored had risen.
• Household and business inflation expectations remain elevated, as indicated by the RBI’s inflation expectations survey of households.
• Interest rate hike in the US: The aggressive stance of the US Federal Reserve and ensuing tightening financial conditions.
• India is better placed today than in 2013 to face the Fed’s actions with a stronger forex shield.

How US Fed’s actions affect India?

• India is not insulated.
• Capital outflow: The headwinds now are stronger than in 2013 and we have seen net capital outflows since October 2021.
• S&P Global expects the US federal funds rate to be hiked to 3-3.25 per cent in 2023, higher than the pre-pandemic level, and highest since early 2008.
• Despite a strong forex hoard, the RBI has had to deploy monetary policy to mute the impact of the Fed’s actions.

Inflation and its Impact

• Upward pressure on food inflation: The pressure on food inflation has increased owing to the impact of the freak heatwave on wheat, tomatoes and mangoes, which is driving prices higher.
• This is on top of rising input costs for agricultural production, the global surge in food prices and the expected sharper than usual rise in minimum support price.
• Fuel inflation will remain high, duty cuts notwithstanding, as global crude prices remain volatile at elevated levels.
• Core inflation, the barometer of demand, is a complex story.
• Goods (despite only partial pass-through of input costs) are witnessing higher inflation than services.
• That’s because services faced tighter restrictions during the Covid-19 waves, restricting their consumption and the pricing power of providers as well.
• Service categories that are mostly regulated, such as public transport, railways, water and education, have over 50 per cent weight in core services.
• However, prices of discretionary services such as airlines, cinema, lodging and other entertainment are rising.
• Transportation-related services have seen the sharpest rise in the past six months due to fuel price increases.
• Impact on the poor: For those at the bottom of the pyramid, high inflation hits harder because energy and food are a big chunk of their consumption basket.

Growth Prospects

• S&P Global has recently cut the growth outlook for major economies for 2022 — that of the US to 2.4 per cent from 3.2 per cent, for Eurozone to 2.7 per cent from 3.3 per cent earlier, and for China to 4.2 per cent from 4.9 per cent.
• This will hurt exports which are very sensitive to global demand.

Monetary Policy Actions

• Not all aspects of supply-driven inflation can be addressed via monetary policy.
• So the authorities are complementing monetary policy actions by using the limited fiscal space to cut duties and extend subsidies to the vulnerable.

Way Forward

Monetary tightening impacts growth with a lag of at least 3-4 quarters and the fact that real interest rates are negative and borrowing rates still below pre-pandemic levels, implies monetary policy is unlikely to be growth-restrictive for this year.

Source – The Indian Express