CURRENT AFFAIRS – 04/07/2023

It was during a virtual press briefing in March 2023 on the North Atlantic Treaty Organization’s (NATO) focus on South Asia and the Indo-Pacific region that the United States Permanent Representative to NATO, Julianne Smith, was quoted as saying that “the NATO alliance is open to more engagement, should India seek that”. Reflecting the same sentiment, the U.S. House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party (CCP), in May 2023, recommended strengthening the ‘NATO-Plus’ framework by including India in the grouping. India’s External Affairs Minister S. Jaishankar had rejected this idea by saying that “NATO template does not apply to India”. Yet on the eve of Prime Minister Narendra Modi’s visit to the U.S., in June, Senate India Caucus Co-Chair Mark Warner shared his plans to table a bill to bring India into the NATO Plus fold.

NATO is a transatlantic military alliance of 31 countries, with the majority of members from Europe. After the dissolution of the Soviet Union and the end of the Cold War, many thought that NATO would lose its relevance. On the contrary, NATO has not only survived but also expanded, with Finland joining as its 31st member (April 2023), and Sweden waiting in the wings. NATO appears to be getting the much-needed ground for survival, thanks to Russia’s tirade against it and the invasion of Ukraine. With NATO swelling its expanse, some analysts even see the onset of Cold War 2.0.

“NATO plus” refers to a security arrangement of NATO and the five treaty allies of the U.S. — Australia, New Zealand, Japan, Israel, and South Korea as members — to enhance “global defence cooperation” and win the “strategic competition with the Chinese Communist Party”. Interestingly, the term ‘NATO Plus’ is not an officially recognised or established concept within NATO itself, but has been used in discussions and debates regarding the potential expansion of the alliance. The inclusion of these countries as members would require a complex process of negotiation and assessment of their compatibility with NATO’s principles, obligations, and defence commitments.

While NATO’s earlier target was the Soviet Union and now Russia, the focus of NATO Plus is clearly on containing China. Therefore, considering its disputes with China, India remains a missing link in the framework.

In light of increasing regional security challenges, India joining the NATO Plus framework could provide it with a security umbrella, with protection and deterrence against potential threats. India could also gain access to advanced military technologies, intelligence-sharing platforms, and inter-operability with other member-states. This could potentially strengthen India’s defence capabilities and modernisation efforts. But this bait needs to be assessed in the larger context of India’s strategic autonomy.

First, getting into any NATO framework will annoy Russia and China. Apart from the robust strategic partnership, Russia has been useful to India in dealing with regional security challenges and, importantly, moderating the stance of China. Even though Russia is getting over-dependent on China, post the war in Ukraine, Moscow remains a valuable partner for India. Should it join, in one stroke, India’s solidified strategic partnership with Russia will crumble. Balancing these relationships and managing potential geopolitical consequences would be a significant challenge for India.

Second, while aligning with a U.S.-led alliance system may be tempting due to the threats posed by China, it could ultimately prove counterproductive and detrimental. Having a military framework will limit India’s freedom of action and prevent it from pursuing an independent policy towards China. Moreover, at a time when India has its own bilateral issues with China and a strategy for the Indo-Pacific, hopping into the Taiwan strategy of the U.S. under NATO Plus will complicate India’s security, with the possibility of Chinese justification for further military build-up along the India-China border and frequent intrusion.

Third, India has traditionally maintained a policy of strategic autonomy, allowing it to engage with various nations and blocs based on its own interests. Joining a NATO framework would require India to align its defence and security policies with the objectives and strategies of the alliance, thereby potentially undermining India’s autonomy. While the non-aligned policy will get a quick death, it could strain relationships with countries, especially neighbours and regional organisations that value India’s independent stance, and could also limit its flexibility in engaging with other regional powers.

India’s priorities lie in addressing its own regional dynamics that includes a unique set of security challenges such as border disputes, terrorism, and regional conflicts. While NATO has certain competencies to deal with such issues, its larger geopolitical agenda starting from Eurasia to the Indo-Pacific may divert resources and attention away from these pressing issues and, therefore, will not be of much help to India. For the time being, India’s posturing through the Quad (India, Japan, Australia and the U.S.; the Asian NATO as per China) looks more promising than the NATO Plus bait, though China remains an elephant in the room during its summits.

The Bonn Climate Change Conference was the last big milestone in climate negotiations before the first Global Stocktake under the Paris Agreement at COP28 (Conference of the Parties 28) in Dubai in December. The Global Stocktake is mandated under Article 14 (1) of the Paris Agreement to assess collective progress towards long-term global goals. This includes progress on greenhouse gas reduction, building resilience to climate impacts, and securing finance to address climate crisis. The outcome of the Global Stocktake will inform countries on how to update and enhance their actions.

In 2015, under the Paris Agreement, countries had agreed to “pursue efforts” to limit global temperature rise to 1.5°C. That the Bonn Conference was held in the context of overweening emphasis on restricting global average temperature below 1.5°C as compared to pre-industrial levels was reflected in the negotiations. The two agenda items — mitigation pathways compatible with the temperature goal, and climate finance flows from developed countries to developing countries to enable them to mitigate greenhouse gas emissions (in line with Article 4.5 of the Paris Agreement) — remained points of contention between the developing countries and the Environmental Integrity Group represented by the European Union and others. The signal from the Bonn Conference was that developing countries too need to be more ambitious in their emission reduction if the world is to limit rising global average temperatures in the context of adequate finance being provided by the developed north.

On June 14, climate change negotiators arrived on a compromise on one of the aspects, which relates to the work programme on ‘just transition pathways’. The subsidiary body adopted the draft text aimed at working on ‘just transition pathways’, and the output will be placed at COP28.

The Parties to the Paris Agreement had introduced ‘just transition pathways’ at COP27. India’s climate policy is derived from the principle of common but differentiated responsibilities and respective capabilities. In its long-term low emission development strategy at COP27, India underlined the need for “financing” a ‘just transition’ in sectors such as energy and transport in order to reach net zero emissions by 2070. Thus, ‘just transition’ means that the transformational pathways need to be carried out in a way that is as fair and inclusive as possible to everyone concerned. India is concerned about the difficulties it is going to face in decoupling its economic development from greenhouse gas emissions. India also stated that the route to ‘just transition’ needs to be clubbed with the means of implementation.

The adoption of the ‘just transition pathways’ in the draft text of the United Nations Framework Convention on Climate Change’s Subsidiary Body of Implementation is also aligned with the Paris Agreement strand, which is self-differentiation grounded in the idea of nationally determined contributions. This bottom-up approach was inserted in the Paris Agreement with the idea of allowing developing countries, which face special needs and circumstances, to align their low-carbon development pathways that integrate socio-economic components in line with state-determined development priorities. In the Bonn negotiations, developing countries were able to strengthen the ‘just transition pathways’ as opposed to the developed countries which which laid more emphasis on mitigation. ‘Just transition’ also helps the parties in respecting other soft obligations emanating from the UN Sustainable Development Goals of 2015 and the ILO’s guidelines on just transition.

Climate finance flows are not aligned with the priorities identified by countries in their nationally determined contributions. In the domain of international monetary transfers, accounting remains highly contested. Many observers say that only a fraction of the $100 billion has actually been realised (At the 2009 Copenhagen Climate Change Conference, 2020 was made the deadline for developed countries to jointly mobilise $100 billion a year of climate finance for developing countries). Additionally, adaptation finance has lagged behind mitigation finance, probably due to the absence of universally agreed-upon metrics. At the Conference, the Environmental Integrity Group insisted on the Mitigation Work Programme to be yielding the finance — a move to somewhat digress from the transfer of major portion of international public finance from the developed countries to developing countries. The objective of the Mitigation Work Programme, as per the COP26 mandate, is to urgently scale up mitigation ambitions and implementation in this decade in a manner that complements the Global Stocktake. The programme will work along a number of lines which could include organising workshops to identifying policies and technologies that are actionable solutions.

In the efforts towards aligning climate finance with the Paris Agreement temperature goals, it is important to integrate the World Bank in climate change negotiations and hold it accountable as it is making huge investments in fossil fuels. Therefore, the pursuance of the Global Stocktake as per the Paris Agreement needs to comply with the principle of equity, justice and fairness.

Greedflation refers to price inflation caused by corporate greed for high profits. Progressives in the United States have accused corporate greed as a major reason for the historically high price inflation in the U.S. since the pandemic. The proponents of the idea of greedflation argue that corporate profit margins have risen significantly since the pandemic even though the larger economy has struggled and that this has contributed to high inflation. They contend that the U.S. corporations have allegedly increased the prices of their goods by more than what was necessary to compensate for higher input costs caused by supply-chain bottlenecks.

Proponents of the greedflation theory of inflation see this as a sign of increased market dominance by corporations, and have called for efforts to rein in market power of large corporations and some have even advocated for a ban on price hikes to prevent “profiteering”.

Many economists, however, have questioned the validity of the argument that corporate thirst for higher profits is the cause behind inflation. They see greedflation as a political narrative built around the issue of inflation rather than as a serious economic explanation of high inflation since the pandemic.

Economists who disagree with the greedflation narrative argue that businesses, whether they are large corporations or small companies, cannot arbitrarily set prices as many people seem to erroneously believe. Businesses set prices for their products based on what consumers would be willing to pay for these products. In other words, businesses cannot force consumers to pay a certain price for their goods; they can only try to gauge the maximum price that consumers would be willing to pay and set prices accordingly in order to maximise their profits. If a business sets the price of its product too high, this would cause its goods to go unsold and the business would have no choice but to lower the price of its product to clear its unsold stock.

In short, while businesses have the freedom to raise or lower the prices of their products, it is ultimately consumers who determine the price of any product in the market. So be the case, it may not be sound to argue that corporate greed is behind the rise in inflation.

Moreover, inflation refers to a general rise in the price level (meaning a widespread rise in the prices of goods and services across the broader economy) rather than in the prices of individual goods and services. The only way corporations can influence the overall price level is by reducing the supply of goods and services. There is, however, no evidence to suggest that there has been a deliberate reduction in the output of U.S. corporations recently. Even if corporations cut down their output, the drop in output is likely to be temporary as other suppliers would rush to meet the demand.

It is thus extremely unlikely that U.S. corporations caused prices to rise across the board in recent years by somehow adversely influencing the aggregate supply of goods.

The current bout of high inflation in the U.S., most economists believe, is much better explained by the U.S. Federal Reserve’s expansionary monetary policy during the pandemic which put more money in the hands of U.S. consumers, who in turn have bid up the prices of goods and services in the economy. The U.S. money supply rose by a whopping 40% in the wake of the pandemic and this combined with supply-chain bottlenecks caused by stringent lockdowns led to high inflation.

Economists have also pointed out that the cost of inputs used by businesses has risen at a faster pace than the pace at which the prices of consumer goods have risen. In such a climate, the rise in the profit margins of corporations has come as a surprise. It should be noted, however, that corporations represent just a tiny share of the total number of businesses in the U.S. economy, so their rising profit margins may not present a true picture of the health of businesses in the wider economy. In fact, it could well be the case that large U.S. corporations benefited from the demise of smaller businesses during the pandemic by capturing more of their market share.

While this suggests that the market dominance of U.S. corporations may have risen considerably, particularly since rising profit margins could possibly be a sign of weakening competition among businesses, it still does not mean that rising profit margins are the reason behind high inflation. As noted earlier, prices are ultimately determined by buyers and not by sellers.

Greedflation has been compared to other theories of “cost-push” inflation which attribute inflation to a rise in input costs. For example, in the past, a rise in the wages demanded by workers has been blamed for the rise in the prices of goods and services. In the case of greedflation, it is the rise in the corporate thirst for profits that is seen as a cost that is driving up prices.

A criticism of the cost-push theory of inflation has been that it ignores the fact that the cost of producing any good is itself determined indirectly, but ultimately, by consumers. It should be noted that the cost of inputs, which can be used towards different alternative ends of society, is determined by competitive bidding in the market.

Indian refiners have begun paying for some oil imports from Russia in Chinese yuan, sources with direct knowledge of the matter said, as Western sanctions force Moscow and its customers to find alternatives to the dollar for settling payments.

Western punishments over Russia’s invasion of Ukraine have shifted global trade flows for its top export, with India emerging as the largest buyer of seaborne Russian oil even as it casts about for how to pay for it amid shifting sanctions.

The U.S. dollar has long been the main global oil currency, including for purchases by India, but now the yuan is playing an increasingly important role in Russia’s financial system because Moscow has been frozen out of the dollar and euro financial networks by international sanctions.

“Some refiners are paying in other currencies like yuan if banks are not willing to settle trade in dollars,” said an Indian government source.

Indian Oil Corporation in June became the first to pay for some Russian purchases in yuan, three sources familiar with the matter said. All the sources declined to be named because of the sensitivity of the matter. At least two of India’s three private refiners are also paying for some Russian imports in yuan, two other sources said.

None of India’s private refiners — Reliance Industries Ltd, Russia-backed Nayara Energy and HPCL Mittal Energy Ltd — responded to requests for comment. Indian Oil also did not reply to a request for comment. It could not immediately be determined how much Russian oil Indian refiners have bought with yuan, although Indian Oil has paid in yuan for multiple cargo loads, sources said. The rise in yuan payments has given a boost to Beijing’s efforts to internationalise its currency, with Chinese banks promoting its use specifically for Russian oil trade. Since the imposition of sanctions on Moscow, Indian refiners have mostly bought Russian crude from Dubai-based traders and Russian oil companies such as Rosneft, the Litasco unit of Russian oil major Lukoil, and Gazprom Neft, according to shipping data compiled by Reuters. Indian refiners have also settled some non-dollar payments for Russian oil in the United Arab Emirates’ dirham, sources have said. “First preference is to pay in dollars but refiners sometimes pay in other currencies such as dirham and yuan when sellers ask them,” said the government source. India’s Oil and Finance Ministries did not respond to requests for comment.