Y V Reddy: India - the global partner
Introductory remarks by Dr Y V Reddy, Governor of the Reserve Bank of India, at the World
Leaders' Forum, Columbia University, New York, 15 April 2008.
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Dean Coatsworth, Professor Bhagwati, Professor Radon, students, faculty and alumni of
Columbia University, and members of the wider New York City Community.
I am grateful to President Bollinger for extending me an invitation to participate in the
prestigious World Leaders Forum at the Low Memorial Library. Distinguished past speakers
at the Forum include, I am informed, President Clinton, President Putin, The Dalai Lama and
Noble laureate Joseph Stiglitz. I am greatly honoured by the invitation and look forward to the
informal dialogue with the highly respected Dr. Jagdish Bhagwati.
By way of an introduction, I will present select aspects of the engagement of independent
India with the global polity and economy.
While India became independent on 15th August 1947, it became a Republic on 26th
January 1950, with the adoption of a written Constitution which is governing the nation. Dr.
B.R. Ambedkar, the architect of the Indian Constitution, had the benefit of education at the
Columbia University where he obtained a Ph.D. Prof. John Dewey inspired many of Dr.
Ambedkar's ideas about equality and social justice. Prof. Edwin Seligman, himself a friend of
Lala Lajpat Rai, the legendary fiery freedom fighter of India, became a mentor to the young
Ambedkar. Dr. Ambedkar also benefitted from his research and education in London. These
are examples of how India's freedom movement and the Constitution, that binds our
governance today, have benefitted from partnering with the global scholarship, in general,
and with the special relationship with Columbia University and the United States, in
particular. Incidentally, the Columbia University conferred an honorary degree on the first
Prime Minister of India, Pandit Jawaharlal Nehru, on his first visit to the US soon after our
independence.
An important characteristic of the global society is the sheer diversity of races, religions,
cultures, ideologies and languages. India has the distinction of reflecting, in itself, the great
diversity of the global society. For example, India is a home to the largest number of people
practising Zoroastrianism - who are also known as Parsees. Two of India's provinces are
governed by communist parties. In fact, we are a unique federation where the boundaries of
existing provinces are redrawn and new provinces are created, to accommodate aspirations,
while remaining strictly within the provisions of the Constitution. We have several national
languages in which governments' businesses are conducted. Every currency note that you
see in India has the denomination written in seventeen languages with different scripts. In
brief, independent India believes firmly, in dialogue, accommodation and assimilation of
multiple identities of people.
These characteristics enable the Indian people and the Indian corporates to live and work
harmoniously alongside other nationalities.
India's record as a responsible nation in honouring its commitments is well known.
Specifically, independent India has never reneged on its monetary obligations to the rest of
the world and has not sought any noticeable rescheduling of its payment obligations. In
1991, we had a liquidity crisis in currency, mainly due to the war in Iraq and the breakdown of
trade with USSR, but we preferred to pledge gold, initiate a massive import compression and
start a reform process with assistance from the IMF and the World Bank. The entire burden
of crisis and adjustment was successfully borne by the domestic economy.
In the current environment of financial turbulence, and also a possible unwinding of macro
imbalances, India plays a stabilising role with a modest current account deficit in most of the
recent years, at around one per cent1 of GDP, and a market determined exchange rate. India
has not been contributing to the global macro economic imbalances, though it has a stake in
how the issues get resolved in the near future.
Currently, there is a debate on the role of Sovereign Wealth Funds. India is in receipt of
investments from several of them either directly or indirectly, and hence, is interested in the
current debate. For its part, the country's foreign exchange reserves amounting to about US$
300 billion continue to be managed by the Reserve Bank of India, typically as per mandate
similar to those of other central banks around the world and consistent with the IMF
guidelines. However, the Indian corporates, based on account of their own commercial
judgements, take investment positions and merge or acquire other undertakings in other
countries. Public policy neither provides incentives nor disincentives for such market based
initiatives by the Indian corporates.
India's external sector has displayed considerable strength and resilience since the reforms
in 1991 - despite several domestic as well as global political events and supply shocks in
food and fuel. Interestingly, India's external trade in goods and services as a percentage of
GDP is more than that of the United States (at 48 per cent and 29 per cent respectively), and
is, in a way, indicative of the extent of India's trade integration with the global economy. India
is fully convertible on the current account, but we do have requirements of repatriation and
surrender of export earnings to ensure that capital account transactions do not take place
under the guise of current account. Capital account is almost fully open to non-residents, well
regulated financial institutions, and corporates. In regard to residents, capital account is
almost fully open to resident corporates and partially open to individuals and financial
intermediaries. In brief, we partner with the global economy fully on the trade and the current
account while there is progressive liberalisation of the capital account, consistent with the
progress in reforms in the real, fiscal, and financial sectors.
The current turbulence in financial markets and institutions - particularly in the USA, has
raised enquiries about the possible contagion. The money, government securities and
foreign exchange markets have been stable in India and, in our view, they may not be
vulnerable in terms of direct and first-round effects. However, the Indian equity markets,
which often reflect global trends, have been volatile in the recent months and that has some
impact on changing sentiments. We have a bank-dominated financial sector, and banks have
a strong capital base.
In response to the global developments and the rapid growth in money supply, credit, and
asset prices in India, we have since 2004 increased, in regard to banks, the risk weights and
the provisioning requirements, and decreased or rationalised the exposure limits to select
sectors. These were combined with prudential stipulations on off-balance sheet items and
relationships between banks and non-bank finance companies. Several safeguards have
been built in terms of prudential guidelines and access to repo markets to guard against
liquidity-related problems to banks. Above all, withdrawal of monetary accommodation
commenced in 2004 and has been gradually fine-tuned, remaining sensitive to early signs of
overheating, while related prudential measures were addressing exposure of banks to risks
in assets. Hence, in our assessment, the Indian financial sector is likely to be less affected by
the contagion than most other EMEs, in respect of first-round or direct effects.
A few words about the state of the Indian real economy may be in order. The annual growth
in real GDP since 2003-042 has averaged 8.7 per cent. Investments and savings as
percentage of GDP have been in excess of 30 per cent since 2004-053 thus indicating a
potential for continued growth in output and productivity over the medium term. Similarly, like
most of the rest of the world, India has, by and large, experienced benign inflationary
conditions averaging around 5.2 per cent since 2004-054. However, at this juncture, both
domestic output and prices are under some pressure due to recent global developments with
regard to the prices of food, fuel and metals, and the turbulence in the financial markets.
Our main challenges are eradication of poverty, efficient use of water, reviving growth in
agriculture, improving physical and social infrastructure, upgrading human skills and, above
all, fiscal empowerment coupled with the increasing real sector flexibility. Our strengths
mainly are the demographic dividend, the stability of the political system, and the emergence
of a very broad based and growing entrepreneurial class, which has a penchant for
innovation. In overcoming the challenges and taking advantage of the strengths, our
engagement with global economies, in particular with the United States, is bound to play a
very critical role.
We are optimistic about a continued mutually beneficial engagement with the global
economy. Indians are providing services in various parts of the world - U.S.A., Middle East,
U.K. and East Asia. Their services range from the less skilled, at one end of the spectrum, to
the very highly skilled professionals at the other end. Their annual contribution by way of
remittances is about three per cent of GDP now. These are in addition to export of services,
especially software which are of the same order. Indians are among the most significant
foreign students to attend the universities for higher education in USA, UK, Australia,
Canada, Singapore, China, etc.
Following sustained higher growth in India, a reverse process of brain flow has also
commenced by way of foreign nationals and expatriate Indians expressing their interest for
pursuing more fruitful ventures in India. As a result, corresponding trade and private business
linkages have also started growing. To illustrate, recently a globally active bank has launched
a product in India - "Account for Expatriates" - for providing value-added services for the
rapidly growing expatriate community in India.
This engagement with the global economy has matured into a self reinforcing process as
benefits are perceived by many and they are percolating to a large number of people in India.
Given the diversity of India in respect of social, political and financial systems, public policy
considerations demand that India's integration with the global economy be managed through
a participative and consultative manner, and in a gradual fashion.
I look forward to an engaging, educative and enlightening interactive session. Thank you.