(FREE) UPSC Current Affairs 2024 PDF

THE GIST of Editorial for UPSC Exams : 15 October 2020 The RBI tunes in to the economy (The Hindu)

The RBI tunes in to the economy (The Hindu)

Mains Paper 3: Economy
Prelims level: Inflation
Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Context:

There is nothing like a crisis to concentrate the mind.
The salienceof this saying may be found in the changes taking place in the economic policymaking establishments of the world.
The COVID-19-triggered recession had led to some of their strongly held assumptions being revised.

Shift away from dogma:

Perhaps the most significant of them is the shift indicated by the Chair of the Federal Reserve (Fed), Jerome Powell, declaring that the Fed will not let inflation stand in the way of maximising employment.
The practical counterpart of this is that the Fed will no longer raise rates pre-emptively, i.e., in anticipation of inflation.
The reason for this, he declared, was that the Phillips Curve, the relationship between inflation and unemployment, may no longer hold in the U.S. economy.
Mr. Powell went on to say that he will even be guided by the consideration of unemployment among vulnerable groups within the American population, namely African-Americans and Hispanics.
It took a lawyer to call out the emperor. The Phillips Curve has been a mighty presence in the canon of Anglo-American economics.
Yoked as much of India’s economic policymaking has been to intellectual developments in the West one would expect some changes in how our own central bank, the RBI, will change now that the Fed has.
We are not disappointed.
In the recent reconstitution of the Monetary Policy Committee, which conducts monetary policy in India, we can find a refreshing shift away from dogma.
Not all its members may be macro-economists in the conventional sense but their work conveys that they will not be governed by rigid adherence to the model of inflation underlying RBI’s inflation targeting policy.
This change has not come a day too early, and India’s government and central bank have done no one any favours by bringing it about.

Inflation concern:

Data show that the model that currently guides India’s inflation control strategy may be quite irrelevant.
This is seen in the recent behaviour of inflation. We know that output contracted by more than 23% in the first quarter of this year.
Despite this staggering decline the inflation rate did not budge, an experience that flies in the face of the proposition that inflation reflects an ‘over heating’ economy, one growing too fast in relation to its potential.
This view represents the RBI’s official understanding of inflation, and presumably forms the basis of its policy of inflation targeting.
It was endorsed by the Government of India when it legislated the modern monetary policy framework to enable the RBI to pursue inflation targeting.
If the Phillips Curve, which the RBI’s approach internalises, exists, inflation should have abated as India’s economy contracted during the lockdown, implying a ‘cooling off’ as it were.
So far, the RBI has shown little time for a handy account of inflation that can explain the recent experience of inflation in India.
It had been imagined with developing economies in mind, and is based on the idea that food prices are an important determinant of inflation along with imported inflation.
Accordingly, a macroeconomic contraction need not lower inflation.

Model to forecast inflation:

A committee somewhere may hardly be sufficient to bring about a change in the mindset of a major arm of the Indian state.
Hopefully, though, the economic havocwreakedby COVID-19 will lead to a more sober and rooted policymaking.
We may even be seeing some green shoots.
A recent working paper of the RBI’s research department has received attention in the media for suggesting that a more eclectic model than the one that underlies inflation targeting does a better job of forecasting inflation in India.
This model accepts a role for food prices, a possibility that is missed when embracing economic models developed in the western hemisphere, where food prices have stopped trending upwards over half a century ago.
Better late than never, we might say. That India’s central bank is finally alive to India’s economy is surely good news for Indians.

Online Coaching for UPSC PRE Exam

E-Books Download for UPSC IAS Exams

General Studies Pre. Cum Mains Study Material

Prelims Questions:

Q.1) With reference to education for deaf children, consider the following statements:
1. Recently a MoU signed between Indian Sign Language Research and Training Center (ISLRTC) and NCERT to make education materials accessible for Deaf children in their preferred format of communication.
2. The Indian Sign Language Research and Training Center (ISLRTC), Delhi is a Society under the Department of Empowerment of Persons with Disabilities, the Ministry of Social Justice and Empowerment.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2