CURRENT AFFAIRS

ASSIGNMENT
SUBMITTED BY:
RAUNAK MANDHANIA (33264)
Q2: There is no monetary solution to inflation in India.

For some months now, signs of recovery from the global crisis have brightened up the
horizon. The pulling out of the downturn is led by a strong rebound in Asia where various
economies are perched at differing points of the cycle, with India and China set to stage a V
shaped turnaround. While the jury is still out on whether or not the worst is behind us, there is
a broader consensus that the healing is likely to be sluggish and hesitant, jobless and credit
constrained, at least in the initial stages. There appear to be potholes in the path to recovery.
A major concern is that inflation risks are rising, especially in developing countries, and there
is a real danger that monetary policy in these countries will have to be tightened sooner than
later, and that growth will be stifled in its infancy.

Inflation developments are posing a daunting dilemma to monetary policy authorities across
the world – ‘today's most perplexing economic debate’ as it has been termed (Samuelson,
2009). Headline inflation appears to be low across the world with risks of deflation persisting
in some parts, and the apparent slack in economic activity is providing the rationale for
continuation of highly accommodative monetary policy. At the same time, there are growing
fears that the seeds of future inflation are being sown in the bed of abundant liquidity and this
has formed the raison de etre for the advocacy for coordinated exit strategies from
accommodation.

In India, perhaps more starkly than elsewhere, the dilemma is at the razor’s edge. While the
headline wholesale price index (WPI) inflation rose from around 1 per cent in October 2009
to 9.9 per cent in February 2010, consumer price index (CPI) inflation has been running in
double digits on the back of high food prices for more than a year. Double-digit inflation is
also showing up in the food component of the WPI. The index of food articles increased 17.8
per cent in February 2010 from a year earlier. The index of primary articles prices, with a
22.03 per cent weight in the wholesale price basket and comprising mainly of food items,
rose 15.5 per cent! Worrisome is the fact that these developments are occurring in an
environment of abundant liquidity.

The weight of food in the Indian consumption basket is roughly 41%. Monetary policy is
suspected to have relatively little impact upon food inflation, which is shaped by supply
factors such as weather and government policy in agriculture. Is the dominant story in
inflation food inflation, and if so, does this suggest that inflation is not a problem?

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India's food inflation eased for the second straight week in January, tracking lower fruit and
vegetable prices, but accelerating headline inflation in December is likely to put pressure on
the central bank to raise rates at a policy review next week.

INDIA-FOOD INFLATION/FACTBOX:

At 15.5 per cent, food inflation remains high, though it has eased from the one-year high of
18.32 per cent touched in late December, mainly on a spike in onion and tomato prices. Here
are some facts about what led to the sudden rise in food prices and how the government is
likely to deal with it.

THE PROBLEM:

Food inflation has been in double digits for most of last year despite a series of central bank
rate hikes, prompting a central bank deputy governor to say that monetary tools are largely
ineffective.

Unseasonable rains during the October-November harvesting season for onions in key
growing states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu spoilt much of
the summer crop which led to a supply shortage.

Other food crops such as potatoes and tomatoes, which are grown around the same regions,
also suffered. While vegetables prices rose an annual 65 per cent, onion prices skyrocketed
nearly 100 per cent on year, the latest government data showed. Vegetables are part of the
food basket which contributes more than 14 per cent to the wholesale price index (WPI),
which is the most widely watched gauge of prices in India.

SHORT FIXES:

Vegetables like onions and potatoes are perishable, so imports are not feasible. As the
government does not procure perishable commodities, unlike wheat and rice, there is no
buffer stock for release during a supply crunch.

India recently contracted 1,000 tonnes of onion imports, but that is unlikely to help much as
supply shortfall is estimated at 1 million tonnes this year. A tweaking of duties may not help
either as most of India's vegetable demand is met by local produce.

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LATE CROP BOON:

Cracking down on hoarders may help, even though that measure has yielded limited success
so far. But, the gradual arrival of late harvest of onions, tomatoes and potatoes to the markets
has slightly eased the supply crunch. Late harvest accounts for a quarter of the annual
production of these vegetables.

The government still estimates a shortfall of 1 million tonnes in onions this year, which is
expected to keep prices high for some time. Food inflation is expected to stay in double digits
until March, analysts say.

EXPORT BAN:

India has already scrapped duty on some vegetable oils and pulses and banned exports in
them as the country is a net importer of these commodities. The measures have helped keep
prices relatively under check.

But, as India imports half its requirement of edible oils, an element of imported inflation
would seep through as global prices rise. The government can use tools like procurement
price, called minimum support price in India, to incentivise producers to increase area under
cultivation. Acreage under pulses till last week rose 5.8 per cent to 14.5 million hectares,
government data showed

BOUNTIFUL GRAINS:

India's grains stocks stood at 47.1 million tonnes against a target of 20 million tonnes. The
government has banned exports of wheat and most forms of rice as global prices are higher.

LONG-TERM SOLUTIONS:

The government has a work-in-progress list for long-term supply-side solutions. It has to pare
the plethora of middlemen in the farm-to-fork chain by overhauling agricultural marketing
regulations and introducing foreign direct investment in multi-brand retail, both politically
difficult to achieve.

But, by investing heavily in cold storage improvements and transportation, the government
could help avoid price spikes in perishables like vegetables. With 60 per cent of India's
workforce engaged in agriculture, which accounts for barely 15 per cent of India's gross
domestic product, the government needs to bring in land reforms, especially to tackle the

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problem of low agricultural productivity stemming from small land holdings and leading to
stagnant yields.

LIMITED IMPACT:

Monetary measures are largely ineffective in controlling what is a supply-side problem but
the Indian central bank may intervene for the seventh time within a year to tackle the knock-
on effects of high food inflation. Headline inflation in December accelerated to above 8.4 per
cent and the Reserve Bank of India is expected to raise rates by at least 25 basis points in its
Jan. 25 policy review.

Faced with high food inflation, the Reserve Bank has raised key interest rates by 25 basis
points at its quarterly monetary policy review. The RBI will have to draw a balance between
the competing requirements of containing inflation and promoting growth.

Despite moderating for two weeks, food inflation was still high at 15.52 per cent for the week
ended January 8 on account of rising prices of essential food items like vegetables,
particularly onions and tomatoes, besides fruits, milk and eggs. Though analysts are not sure
whether any further tightening of interest rates can check the price rise, the central bank
seems to have no other option.

Short term can only depend on imports, curbing speculation and releasing the food that we
have. Now the major problem is about inflationary expectations also. But the inflationary
expectations are very high leading to a speculative surge in prices. The speculation is not only
by traders but even by an average household. If they expect the prices of vegetables to go up
it makes more sense for them to buy more. Your and my families will buy more onions or
more of something if you have the cash when you expect prices to go up. So price
expectations play an important role in effectiveness of any price control in a sensitive
commodity like food or vegetables which are perishable and which in the short term you can't
increase supply. I don't know.

Naturally. For the lower middle class and the middle class it is a shocking thing. This kind of
rise in prices is unexpected, but I think government has to think about the medium term.
Some of these are long term problems. The question therefore is what happened in 2011' you
take the agriculture situation. It has persisted for a long time. The issue of prices of some
vegetables going up and some going down has been there. What has changed the situation

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unexpectedly is the issue the government has to grapple with. I think there is too much talk of
inflation falling. If it doesn't then it establishes a question of credibility.

At the moment the highest priority should be inflation. For the country growth is important
but in the trade-off between growth and inflation I would give higher priority to inflation.

Between monetary policy and inflation there is a transmission lag. Transmission lag means if
you do something today it won't have an impact tomorrow. If you want a short-term answer
to this question the obvious point is that yes monetary policy is not effective in the short-run
in controlling inflation when it has gone out of hand. But over a period of time certainly
because money supply matters. In the long run monetary policy is important.

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Q1. Saudi Arabia is a flash point of terrorism. Discuss.

The attacks of September 11, 2001 fuelled criticism within the United States of alleged Saudi
involvement in terrorism or of Saudi laxity in acting against terrorist groups. One area of
particular concern is the suspicion that public or private funds may be flowing from Saudi
Arabia and other Middle East countries to finance international terrorist activity. Reliable
figures on the amount of money originating in or passing through Saudi Arabia and ending up
in terrorist hands generally are difficult to obtain, for several reasons. First, the relatively
small amounts of money required for terrorist acts can easily pass unnoticed. Second, the
structure of the Saudi financial system makes financial transfers difficult to trace. Personal
income records are not kept for tax purposes in Saudi Arabia and many citizens prefer cash
transactions. Third, Muslim charitable contributions (zakat) are a religious obligation,
constituting one of the five “pillars of Islam.” Contributions are often given anonymously,
and donated funds may be diverted from otherwise legitimate charities. Moreover, Saudi
funding of international Islamic charities is reportedly derived from both public and private
sources which in some cases appear to overlap, further complicating efforts to estimate the
amounts involved and to identify the sources and end recipients of these donations.

Once upon a time, there were solid grounds for a partnership between the United States and
Saudi Arabia. After World War II, the kingdom's vast oil reserves and willingness to use its
production capacity to ensure moderate and stable world oil prices were rightly judged to be
vital to American national security. In return for these strategic assets, the United States
pledged to protect the kingdom's oil supplies and obstruct those who would seek to control
them, particularly the Soviet Union. Thus, when FDR met with King Abdulaziz bin Saud in
1945, a marriage of convenience was born. But the original reasons for this marriage of
convenience have long since faded away. It is time for a divorce.

Cracks in the Marriage

The first indications that the foundations of this partnership were eroding came in the early
1970s, when the Saudis took the lead in establishing the OPEC oil cartel. Saudi Arabia was
among the three leading instigators of the 1973 embargo on oil shipments to the United States
and was the principal beneficiary of it. Rather than standing by the United States at a time
when tensions between American and Soviet naval vessels in the Mediterranean were at an
all-time high, the Saudis cut off oil supplies to the U.S. navy in October of that year.
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The rationale for this partnership completely unravelled following the 1979 establishment of
an Islamic Republic in Tehran, when Iranian clerics challenged the religious credentials of
the Saudi monarchy. Ayatollah Khomeini condemned Saudi royals as corrupt, venal and
decidedly un-Islamic. That they should be challenged at all was bad enough - that they should
be challenged by Shiites, regarded as a heretical sect by most Sunni Muslims, was
intolerable.

The Monster they created

The Soviet invasion of Afghanistan in December 1979 provided the kingdom with an ideal
opportunity to sponsor a bona fide holy war that would showcase Wahhabi ideals and quiet
Iranian-inspired Islamist opposition to the monarchy. Madrasas around the Arab and Islamic
world produced shock troops for this jihad. After the Russians were driven out of
Afghanistan, these "Arab Afghans" began trickling home and looked for other jihads. The
Saudis had created a monster; to be sure they did not wreak havoc inside the kingdom, bin
Laden and other Saudi Islamists were encouraged to wage holy war abroad. When the
Clinton administration cornered Osama bin Laden in the Sudan in 1998, the Saudis refused to
allow his extradition back home, where he could be neutralized. Instead, the Saudi
intelligence chief – Prince Turki – reportedly offered bin laden $200 million to go to
Afghanistan, on the condition that he not target the Saudi royal family. Bin Laden honored
his promise – there has not been a single attack by Al-Qaeda against the Al-Saud family.
Inside the kingdom, Al-Qaeda has only operated against the Americans and the British. Over
time, the understanding became that bin Laden would leave the Saudis alone only if they
allowed the network of charities funding Al-Qaeda to operate unhindered. On the day after
the September 11 attacks, the first thing Riyadh did was evacuate two dozen members of the
bin Laden family residing in the US on the private jet of its ambassador, Prince Bandar.

"Terrorist funding emanating from Saudi Arabia remains a serious concern." So states a cable
prepared for the visit of U.S. Special Envoy Richard Holbrooke to the kingdom earlier this
year.

While these developments may seem far beyond the horizon of the Israeli-Palestinian
conflict, a careful examination of some of the worst suicide bombings by the Hamas
organization against the State of Israel also leads to Saudi Arabia. As of September 2003,
Saudi clerics were featured prominently on Hamas websites as providing the religious

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justification for suicide bombings. Of 16 religious leaders cited by Hamas, Saudis are the
largest national group backing these attacks the formal Saudi position on suicide bombings,
in fact, has been mixed. To his credit, the current Saudi Grand Mufti, Sheikh Abdul Aziz bin
Abdullah Al al-Sheikh, has condemned these acts. Yet at the same time, Saudi Arabia's
Minister for Islamic Affairs, Sheikh Saleh Al al-Sheikh, has condoned them: "The suicide
bombings are permitted...the victims are considered to have died a martyr's death."

The Hamas-Saudi connection should not come as a surprise. Hamas emerged in 1987 from
the Gaza branch of Muslim Brotherhood which, as noted earlier, had become a key Saudi ally
in previous decades. When Hamas spiritual leader Sheikh Ahmed Yasin was let out of an
Israeli prison in 1998, he went to Saudi Arabia for medical treatment and Crown Prince
Abdullah made a high-profile visit to his hospital bedside. As late as early 2002, Abdullah
was hosting Sheikh Yusuf al-Qaradhawi, the spiritual leader of the Muslim Brotherhood. Bin
Laden had made the fate of Sheikh Yasin an issue for his al-Qaeda followers as well. In his
1996 "Declaration of War," he listed Sheikh Yasin's release from prison as one of his
demands or grievances.

Saudi support for suicide bombings has wider repercussions. Other militant Islamic
movements cite Saudi Wahhabi clerics to justify their activities - from the Chechen groups
battling the Russians to Iraqi mujahidin fighting the U.S. in western Iraq. Coincidentally, the
ubiquitous IIRO was lauded by the Saudi press for its support activities in the Sunni districts
of post-Saddam Iraq, as well. Its presence was usually indicative in other regions of Saudi
identification with local militant causes. In order to evaluate the significance of these
religious rulings, it is necessary to focus on the stature of these various Saudi clerical figures
that jihadi movements worldwide were citing.

For example, just after the September 11 attacks, it is true that many Saudi government
officials condemned them. But there were other voices as well. Shortly thereafter a Saudi
book appeared on the Internet justifying the murder of thousands of Americans, entitled The
Foundations of the Legality of the Destruction That Befell America. The Introduction to the
book was written by a prominent Saudi religious leader, Sheikh Hamud bin Uqla al-Shuaibi.
He wrote on November 16, 2001, that he hoped Allah would bring further destruction upon
the United States. Al-Shuaibi's name appears in a book entitled the Great Book of Fatwas,
found in a Taliban office in Kabul. Sheikh al-Shuaibi appears on the Hamas website, noted
earlier, as a religious source for suicide attacks. Attacks on U.S. soldiers in western Iraq by a
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Wahhabi group called al-Jama'a al-Salafiya were dedicated to his name and to the names of
other Saudi clerics. Al-Shuaibi's ideas, in short, had global reach.

The question that must be asked is whether a religious leader of this sort is a peripheral figure
on the fringes of society or whether he reflects more mainstream thinking. In fact, al-Shuaibi
had very strong credentials. Born in 1925 in the Wahhabi stronghold of Buraida, he was a
student of King Faisal's Grand Mufti, Sheikh Muhammad ibn Ibrahim Al al-Sheikh. Al-
Shuaibi's roster of students read like a "Who's Who" of Saudi Arabia, including the current
Grand Mufti and the former Minister of Islamic Affairs and Muslim World League secretary-
general, Abdullah al-Turki. When al-Shuaibi died in 2002, many central Saudi figures
attended his funeral. In short, he was mainstream. His militant ideas about justifying the
September 11 attacks were echoed by Sheikh Abdullah bin Abdul Rahman Jibrin, who
actually was a member of the Directorate of Religious Research, Islamic Legal Rulings, and
Islamic Propagation and Guidance - an official branch of the Saudi government.

In 2003, the religious opinions of Saudi militant clerics were turning up in Hamas educational
institutions in the West Bank and Gaza Strip. For example, the Hamas-oriented "Koran and
Sunna Society-Palestine," that had been established in 1996 in Kalkilya, had branches in
Bethlehem, Salfit, Abu Dis, Jenin, and the Tulkarm area.10 It distributed Saudi texts praising
suicide attacks against "the infidels" and condemning those who dodge their obligations to
join "the jihad." The pro-Hamas "Dar al-Arqam Model School" in Gaza, that was established
with Saudi aid, used texts that cited Sheikh Sulaiman bin Nasser al-Ulwan, a pro-al-Qaeda
Saudi cleric, whose name is mentioned in a bin Laden video clip from December 2001. Both
the "Koran and Sunna Society-Palestine" and the "Dar al-Arqam Model School" were
supported by the Saudi-based World Assembly of Muslim Youth (WAMY) (see below), and
were part of the "civilian" infrastructure of Hamas. Militant Saudi texts extolling martyrdom
were infiltrated into schools throughout the West Bank and Gaza Strip, creating a whole
generation of students that absorbed their extremist messages. The export of this jihadi
ideology to the Palestinians was reminiscent of the Saudi support for madrasses in western
Pakistan during the 1980s, that gave birth to the Taliban and other pro-bin Laden groups.

It is one of several that have appeared on the WikiLeaks site to indicate that despite some
progress, the flow of cash to extremist groups in Pakistan and Afghanistan from individuals
and charities in the Gulf has certainly not been halted.

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The cable, written by U.S. Ambassador James B Smith, says that the Saudis are "cooperating
more actively than at any previous point to respond to terrorist financing concerns raised by
the United States, and to investigate and detain financial facilitators of concern."

It says the Saudi Ministry of Interior had begun to detain individuals involved in funding
networks for groups such as Lashkar e-Tayyiba (LeT), an extremist Pakistani group that
carried out the Mumbai attacks in 2008, the Taliban, and Hamas.

But it says donors in Saudi Arabia "continue to constitute a source of funding to Sunni
extremist groups worldwide, especially during the Hajj and Ramadan." And it adds the
kingdom remains "almost completely dependent on the CIA to provide analytic support and
direction for its counterterrorism operations."

The U.S. Treasury has led efforts to block sources of terrorist funding, establishing the "Illicit
Finance Task Force" and sending specialists to Kabul, Afghanistan, and elsewhere to help
follow the money. It also established an office in Riyadh, Saudi Arabia, in 2008. Treasury
sources said earlier this year that other Gulf States had been less co-operative than the Saudis;
and other cables obtained by WikiLeaks describe hundreds of millions of dollars in cash
being flown from Kabul to various destinations in the region.

The Saudi authorities have made some high-profile arrests in the last two years. Ambassador
Smith's cable says the Ministry of the Interior timed its announcement in August 2009
regarding the arrest of 44 terrorist supporters "to deter potential donors from giving money to
suspected terrorist groups during Ramadan."

However, one leaked cable sent by U.S. Secretary of State Hillary Clinton in December 2009
noted that "it has been an on-going challenge to persuade Saudi officials to treat terrorist
financing emanating from Saudi Arabia as a strategic priority." It adds: "Donors in Saudi
Arabia constitute the most significant source of funding to Sunni terrorist groups worldwide"
-- running into millions of dollars.

This analysis was intended to disclose the critical role of Saudi Arabia in providing
ideological and financial support for the new terrorism. While most of the evidence presented
here comes from the specific case of Hamas, the modus operandi adopted in the Hamas case
is probably applicable to other parts of the global terrorist network as well. This is especially

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true of the critical role of Saudi Arabia's global charities in sustaining many similar militant
organizations from Indonesia to central Russia. While Saudi spokesmen have provided
repeated assurances that they have cleaned up these activities, their denials with respect to
terrorist funding do not stand up against the documented evidence that has accumulated in the
last two years.

The Saudi government faces hard dilemmas. It has recently taken disciplinary action against
some of its most extreme religious leaders. But traditionally, the Saudis need the backing of
their clerics to legitimize their regime; that is the heart of the Saudi-Wahhabi covenant that
dates back to the eighteenth century. Yet the Saudis also need the ultimate protective shield
provided by the United States. In order to sustain this, they have spent huge sums of money
for public relations firms and influence-brokers. But the time has come to tell the Saudis that
they have to make a choice. After September 11, there has to be zero tolerance for terrorist
funding and other forms of terrorist support.

The stakes involved are not just a question of public relations or Arab-Israel point-scoring in
Washington. The West needs to come to an understanding with the Islamic world based on
mutual respect and tolerance. The radicalization of the Middle East being promoted by the
Saudis undermines that goal and threatens to substitute instead a vision of perpetual militancy
and conflict. For that reason, what is at stake is nothing less than the security of the United
States and its allies, as well as the question of whether the Middle East moves in the direction
of hope and peace or relapses into a state of continuing strife.

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