Emerging India: A Land of Stability and Opportunities
Keynote Speech by Shri Shaktikanta Das, Governor
Reserve Bank of India
Delivered at the Symposium on Indian Economy 2023 organised
by Institute of Indian Economic Studies
at the Tokyo Chamber of Commerce and Industry,
Tokyo, Japan on November 9, 2023
I am delighted to participate in this symposium on Indian Economy
organised by the Institute of Indian Economic Studies (IIES), Tokyo. I
understand this event is being organised by the IIES after a gap of 3 years
due to the intervening period of the COVID-19 pandemic. Earlier this year
in March 2023, Prof. Sakakibara and Mr. Sugaya had visited the Reserve
Bank of India in Mumbai when we discussed about my participation in this
symposium. I would like to convey my sincere thanks and gratitude to
Prof. Sakakibara and the IIES for inviting me to participate in
this event today.
2. The global economy continues to face multiple macroeconomic and
geopolitical shocks. The prediction of a global recession has not come
true but there are indications that global growth is slowing down amid
tightening financial conditions and still elevated inflation. Even as the
fallouts of the pandemic, the war in Ukraine and the unprecedented
tightening of monetary policy reverberate across the world, the recent
developments in West Asia have added to the litany of challenges for the
global economy. Policymaking in this scenario becomes extremely
challenging with difficult trade-offs - growth versus inflation; price stability
versus financial stability; and current exigency versus future sustainability.
There is always a risk of doing too little or doing too much. In such a
scenario, I would like to start with the Reserve Bank of India's approach
to policy making during this turbulent period.
Our Approach
3. To protect the economy from the relentless shocks in the recent
period, our endeavour has been to remain proactive, pragmatic and
prudent in our policy response. We were conscious of the fact that an
overdose of monetary medicine, while relieving the pain in the short run,
could give rise to increased vulnerability and fragility over a period of time.
Following the onset of the COVID-19 pandemic, we injected liquidity, but
almost every measure of liquidity injection was for a limited period and
was targeted. By doing so, we avoided the pitfall of a liquidity trap. Further,
our lending standards were not diluted in terms of our counterparties
(banks) and collateral requirements for on-lending to stressed entities or
sectors.
4. On the regulatory side also, our actions were measured. We allowed
lenders to offer moratorium on loan repayments and interest payments.
We put in place loan resolution frameworks for the COVID-19 related
stressed assets thereafter. These loan resolution frameworks were not
open ended but subject to achievement of certain financial and
operational parameters. The idea was to avoid the phenomenon of 'moral
hazard' and other pitfalls typically associated with open ended
restructuring of loans.
5. We are acutely aware that a healthy and efficient banking and
financial system is the primary stabilising force against various shocks.
Mindful of this, we have carried out a series of reforms in our regulatory
and supervisory architecture. We have come out with certain governance
guidelines for banks and introduced a scale-based regulation for non-bank
financial companies (NBFCs), based on the size and complexity of their
businesses. The process of supervision of banks, NBFCs and other
financial entities has also been substantially strengthened with the focus
being on early detection and pre-emptive correction, rather than reacting
to the symptoms of weaknesses.
6. Thanks to a confluence of factors, including to a large extent, the
steps taken by the Reserve Bank, the Indian economy has emerged as
an epitome of stability and opportunity. We have not only kept our house
in order against large and overlapping global shocks, but also improved
our macroeconomic fundamentals and buffers. While growth remains on
track, inflation is on a path of moderation, though it is still above the target.
The balance sheets of banks and corporates are healthiest in a long time
and with the public investment push by the Government, they create
favourable conditions for a sustained revival in investment. Consumer
confidence, as evident from our surveys, is on a rising trajectory since the
pandemic lows. Our external sector inspires confidence as we are reaping
export opportunities, in the services sector; our current account deficit
remains eminently manageable; and we have bolstered our forex reserves
to deal with potential eventualities.
7. Today, India has become the new engine of global growth with its
young demography1, improving physical and digital infrastructure and
above all, an enabling policy environment. In this context, Japan and India
continue to be the natural partners. We share deep historical ties. The
teachings of Gautama Buddha have inspired our shared ethos and
cultures. We look up to the Japanese "Economic Miracle" as a learning
opportunity as we prepare the ground to uplift India's growth trajectory.
Japan has played a critical role in infrastructure building in India through
several public and private sector partnerships.2 There are many
collaboration opportunities in frontier technologies such as space
technology, artificial intelligence, quantum computing, rare-earths
extraction, semiconductors and resilient supply chains, and other areas.
Our partnership could also be potentially strengthened in the sphere of
human resources. I am sure the future offers limitless possibilities to
deepen our engagements for the benefit our people and the entire world.
8. It would be worthwhile here to look a little deeper into India's growth
drivers, its experience of managing inflation since the pandemic, and the
emerging opportunities and challenges especially in the FinTech space.
Growth Drivers
9. Policy focus on strengthening macroeconomic fundamentals and
continued structural reforms have made India distinct in terms of growth
outcomes. This was reflected in the rebound in GDP growth after the
pandemic from a contraction of 5.8 per cent in 2020-21 (pandemic year)
to a growth of 9.1 per cent in 2021-22 and 7.2 per cent in 2022-23. The
GDP grew by 7.8 per cent in the first quarter of 2023-24, and the available
high frequency indicators suggest continuation of this momentum. For the
full year 2023-24, real GDP growth is projected at 6.5 per cent by the
Reserve Bank.
10. The innate resilience of the Indian economy could be attributed to
its well diversified economic structure. Although India has made rapid
strides in external openness through trade and financial channels and
gained competitiveness, its core dependence for growth continues to be
its domestic demand which also provides a cushion against external
shocks. Among the constituents of aggregate demand, private
consumption accounts for over half of GDP (around 57.0 per cent average
share during 2011-12 to 2022-23), followed by fixed investment and
government consumption. During the post-pandemic recovery, private
consumption contributed an average of 66.0 per cent to GDP growth
during 2021-22 and 2022-23.3 At the same time, structural reforms related
to banking, digitalisation, taxation, manufacturing, etc., have laid the
foundation for a strong and sustainable growth over the medium and long
term.
11. On the supply side, while the agricultural and the industrial sectors
are maintaining their underlying momentum with renewed focus on
manufacturing, a major part of the India's growth is coming from the
services sector which again largely depends on domestic demand. With
crucial transformations underway, India's services sector is expected to
lift its future trajectory of growth with a major impetus coming from rapid
digitalisation of the economy, which could be a game-changer for
economic development. The external demand for India's services is also
increasingly gaining significance with services exports growing rapidly on
the back of rising competitiveness in niche areas. India's services exports
are diversifying from information technology (IT) related services to other
professional services such as business development, research and
development, professional management, accountancy and legal services.
Domestic services are also undergoing a steady shift from low-skill
consumer-oriented services towards more technology-enabled business
services. The newly emerging start-ups are largely concentrated in the
services sector. Capitalising on India's impressive public digital
infrastructure4, many of these start-ups function as service providers for
other businesses by offering services ranging from facilitating digitization
and improving access to credit.
Managing Inflation
12. As in the case of growth, there are some nuances in India's
experience in managing inflation vis-à-vis other countries. The nature of
inflation shocks throughout much of 2020 and 2021 in India were largely
supply side shocks, coming from COVID-19 lockdowns and adverse
weather events. As lockdowns were withdrawn and the impact of weather
disturbances waned, forces of inflation correction began to operate. The
monetary and fiscal support provided during the pandemic were
measured and targeted. Consequently, demand-led inflation pressures in
India were much less compared to several other economies. The
monetary policy committee (MPC) of the Reserve Bank was, therefore,
able to look through the intermittent higher inflation prints with the aim of
supporting economic growth during and in the aftermath of the COVID-19
pandemic. The MPC took the considered view that policy tightening in
such a scenario would only accentuate the growth slowdown and impart
higher volatility, without being able to properly address the first-round
effects of temporary supply side shocks. This approach was in
consonance with the flexibility embedded in our flexible inflation targeting
framework wherein the primary objective of monetary policy is to maintain
price stability while keeping in mind the objective of growth.
13. In early 2022, with the waning of COVID-19 shocks on inflation,
gradual easing of supply bottlenecks and forecast of a normal monsoon,
inflation was expected to witness a significant moderation to the target
rate of 4 per cent by Q3:2022-23. These expectations were completely
overturned by the war in Ukraine. Initially, the shocks came from the spike
in global fuel and food prices, which got further accentuated by local
adverse weather events. These shocks got transmitted to the retail prices
of goods and services, as domestic economic recovery and rising demand
enabled pass-through of the large pent-up input costs. This also imparted
stickiness to underlying core inflation. The result was a generalized
inflationary impulse.
14. In the period that followed the Ukraine war in 2022, what stood out
in India was the coordinated monetary and fiscal policy response to tame
the inflationary pressures. The MPC quickly changed gears by prioritising
inflation over growth, while changing its stance from being
accommodative to withdrawal of accommodation in April 2022. The MPC
then went on to increase the policy repo rate by 250 bps cumulatively
between May 2022 and February 2023, to keep inflation expectations
anchored, break the core inflation persistence, and contain second round
effects.
15. Looking back, there were several aspects in our conduct of policy
that helped in taking decisive and timely action during the heightened
inflation pressures seen in 2022-23. First, prudence was the cornerstone
of the monetary policy response to the COVID-19 shock, with most of the
extraordinary liquidity injection measures being targeted with pre-set end
dates. This ensured an orderly unwinding of the monetary stimulus as
growth recovered. Second, the Government also adhered to fiscal
prudence, with actual fiscal deficit for 2022-23 kept in line with the Budget
Estimates. Third, complementing the monetary policy measures were a
series of proactive and targeted supply side measures by the
Government.5 All these factors put together, proved to be critical in
moderating the price pressures.
16. As things stand today, the MPC in its October 2023 meeting has
projected CPI inflation at 5.4 per cent for 2023-24, a moderation from 6.7
per cent in 2022-23. Headline inflation, however, remains vulnerable to
recurring and overlapping food price shocks. The core inflation has also
moderated by 170 basis points since its recent peak in January 2023. In
these circumstances, monetary policy remains watchful and actively
disinflationary to progressively align inflation to the target, while
supporting growth.
FinTech Space
17. The advent of FinTechs has transformed the landscape of traditional
financial services. This has tremendously improved the delivery of
financial services by making them faster, cheaper, efficient and more
accessible. India is currently the world's third largest FinTech ecosystem
in terms of the number of FinTechs operating in India. It is growing at a
robust pace and is projected to generate around US$200 billion in revenue
by the year 20306, contributing to approximately 13 per cent of the global
FinTech industry's total revenue in 2030. The defining feature of the Indian
'model' of digitisation is the lead taken by the Government and the Public
Sector in building infrastructures, on top of which innovative products are
created by private sector FinTech firms and start-ups.7 The JAM trinity -
a combination of bank accounts (Jan Dhan); Aadhaar, India's biometric
identity system that provides a single and portable proof of identity; and
Mobile phone numbers - has revolutionised India's FinTech ecosystem in
terms of financial inclusion, digitisation of financial services, and overall
service delivery.
18. On top of this, the Unified Payments Interface (UPI) has played a
phenomenal role in the FinTech revolution in India. Its success story has
in fact become an international model. Its ability to instantly transfer
money between bank accounts through mobile applications has
transformed the way people make digital transactions. The interoperability
of UPI across banks and payments systems has created a unified
payment ecosystem. It has facilitated digital payments even for small
businesses and street vendors, leading to greater financial inclusion. UPI
has also spurred development of new payment related products and
services8. Further, linking of the UPI with fast payment systems of other
countries is also being undertaken. Linkage of fast payment systems of
India and Japan may also be explored to leverage the power of fintech
9
and make cross-border payments more efficient and less costly.
19. The Reserve Bank has also commenced pilot runs of India's central
bank digital currency (CBDC), the e-Rupee, for specific use cases in both
wholesale and retail segments. Our approach to FinTech ecosystem is
customer-centric; focus on good governance; ensuring effective
oversight, ethical conduct and risk management; and encouraging self-
regulation by the FinTechs themselves through a Self-Regulatory
Organization (SRO).
20. Although financial innovation enhances ease of payment and lowers
its cost, they also pose risks and challenges to the financial system. These
risks have a bearing on overall financial stability and market integrity. We,
therefore, intend to play a dual role of acting as promoter of innovation as
8
We are constantly working on new use cases of UPI like UPI Lite that has been introduced
for offline payments, and UPI123Pay that allows feature phone users to perform UPI
transactions. The infrastructure like RTGS and NEFT are also available on 24x7 basis
throughout the year. UPI-PayNow linkage for cross-border remittances between India and
Singapore was launched in February 2023. Other similar linkages with several countries are
work in progress.
9
Presently, remittances from Japan make up only a small fraction (0.2 per cent) of the total
inward remittance receipts by India. However, the cost of sending remittances from Japan to
India through banks is much higher than the United Nations Sustainable Development Goals
(UN-SDG) target of 3 per cent. These estimations based on World Bank's Remittance Prices
Worldwide database.
well as being the regulator. While promoting innovation, our focus is on
ensuring a well-regulated ecosystem that addresses systemic risks and
challenges.
Concluding Observations
21. It is a matter of satisfaction that the Indian economy has sailed
through the turbulent waters smoothly during the recent years. Driven by
its inherent dynamism and supported by a prudent policy mix, growth is
getting stronger foothold while inflation is also coming under control. Our
economic performance also owes a lot to the very calibrated, focused and
targeted monetary and fiscal responses since the pandemic.
22. I must add that in the current uncertain environment, it is best to
avoid any sense of complacency. We remain agile and continue to fortify
our macroeconomic fundamentals and buffers. Today, the confidence and
trust in India's prospects are at an all-time high. To seize the moment,
India looks at Japan as a close partner to usher in a new era of growth
and prosperity, for both our countries. We will be celebrating the festival
of lights, Deepavali, in a few days in India. With Japan as our close
partner, I am sure the land of the rising sun will further light up our spirits
to take our economies and well-being of our people to greater heights.
Thank you. Namaskar.