This is an interesting example of what Chugh, Bazerman and Banaji call Bounded Ethicality. Giving out undeservedly high grades (1) is dishonest and (2) corrupts the degree grading system, and I guess a little thought will make that clear to most people. However, the administration makes the case that not doing so will harm the university’s students. The force of this appeal is: “ignore the global harm, focus on the local benefit”.
This argument is not seriously convincing, but it appeals to people’s instinctive moral parochialism. By doing so, it provides a cover for self-interest. (So it is also an interesting example of self-serving bias.) Fighting grade inflation would take time and effort, and will make you unpopular with important people (or if you are an important person, it would make your university worse off, and you personally less successful). Nobody wants that. But a naked appeal to these motives would probably not work as well as this version which comes dressed up in moral clothes, because academics like to think of themselves as high-minded guardians of the scientific flame.
Perhaps the new Centre for the Study of Integrity could do some work on self-serving moral arguments.