"Building Blocks for a Sustainable Future: Some Reflections"
Speech by Shri Shaktikanta Das, Governor
Reserve Bank of India
Delivered at the 29th Lalit Doshi Memorial Lecture on August 23,
2023 at the Y. B. Chavan Centre, Mumbai
I am deeply honoured for the invitation to deliver this lecture in the
memory of Shri Lalit Doshi, an eminent civil servant, whose sudden
demise at an early age nearly three decades back was a great loss to
many, including the state of Maharashtra. Shri Doshi is fondly
remembered as unassuming, sober, hardworking and extremely
competent by his colleagues and contemporaries. In his distinguished
public service career spanning more than 27 years, he held several key
positions both in the state and central governments. As Secretary
Industries, Government of Maharashtra during 1992-94, till his sad
demise in January 1994, he played a pivotal role in formulating the New
Industrial Policy for the State. I can personally relate to Shri Lalit Doshi
and the challenges he would have faced as Secretary Industries, as I
served as Industries' Secretary, Government of Tamil Nadu on two
occasions (2001 and 2006) and as Joint Secretary Industries in 1991-
1993.
2. The 1990s held out great promise for the industrial sector in India,
following the delicencing of industries and initiation of economic
reforms. In tandem, the Indian rupee was devalued to improve the
competitiveness of the Indian economy. New opportunities for
investment opened up, as domestic and foreign investors looked at
expanding their footprints. The Bombay Club1 took some time to adjust
to the new reality, but adjusted very well over a period of time. In this
milieu, there was growing competition among states to attract
investments on the basis of their fundamentals, supporting
infrastructure, quality and availability of skilled manpower and other
relevant factors.
Doshi's contributions to the development
3. Recognising Shri Lalit
and well-being of the state and the country at large, I have chosen
as the theme of my
"Building Blocks for a Sustainable Future" address
today. Sustainable future would mean sustaining and strengthening the
growth momentum of the economy without creating inflationary
pressures and other macroeconomic imbalances, while remaining
inclusive and climate sensitive. I would like to begin by dwelling upon
the role of a central bank in economic development and highlighting the
current macroeconomic context and then touch upon certain supporting
pillars for a sustainable future.
Central Banks and Economic Development
4. A strong and dynamic central bank acts as a critical building block
for a country's progress.
The story of central banking goes back at least
to the 17th century, when the first institution recognised as a central
bank, the Swedish Riksbank, was formed in 1668. This was followed
While Bagehot's principles of lender
by the Bank of England in 1694.2
of last resort (LOLR) to commercial banks, war financing of
governments, maintaining banking stability amidst recurrent bank
failures have served as the basis for their origin, central banks were
later entrusted with the tasks of banknote issuance and management
of internal and external value of currency. Their role has continuously
evolved over the decades, reflecting the changing political and
economic landscape and now they play a critical role in macroeconomic
and financial stability in modern economies.3 The price stability
objective and the conduct of monetary policy gradually gained
importance in an environment of high and volatile inflation globally.
During the 1990s and the early 2000s, a number of central banks
started focusing narrowly on the price stability objective, with the
responsibility of banking and financial sector regulation shifting to
separate regulatory bodies outside the central bank. The 2008 global
financial crisis (GFC) led to a rethink on this separation principle and
central banks are now more actively entrusted with financial stability in
addition to the price stability objective. More recently, during the
COVID-19 pandemic, central banks resorted to both conventional and
unconventional policies as during the GFC, to safeguard their
respective economies.
5. The framework of central banking in India, and in particular of
monetary policy, has evolved around the objectives specified under the
Reserve Bank of India Act, 19344. Consistent with this, the Reserve
Bank's macroeconomic and monetary policy has focussed on
maintaining price stability, ensuring adequate flow of credit to sustain
the growth momentum, and securing financial stability. The financial
stability objective is enabled by the powers vested with the Reserve
Bank for regulation and supervision of the Indian financial system and
its various segments, including the money, debt and foreign exchange
segments and the payment and settlement system. These are
augmented by critical functions like maintenance of foreign exchange
reserves, issuance of bank notes and currency management, agency
functions such as management of public debt, acting as banker to
Government (Centre and States) and banker to the banking system.
The Reserve Bank also has powers to act as the lender of last resort
whenever necessary. As a full-service central bank, it also promotes
financial inclusion. In all these areas, we have continuously
strengthened our capabilities over the decades in tune with the
transition of the Indian economy from a state-dominated system in the
1950s, 1960s and 1970s to a growing market economy from the 1990s
onwards.
6. The process of liberalisation and globalisation of the Indian
economy initiated since 1991 added several new dimensions to the
responsibilities of the Reserve Bank. Along with financial sector
reforms, the monetary policy framework has been fine-tuned over the
years, leading to the flexible inflation targeting framework in 2016. Over
the last three years, we have utilised the flexibility in the monetary policy
framework to calibrate our actions to counter the adverse effects of
COVID-19 and the war in Ukraine. During the COVID-19 pandemic, our
monetary policy committee (MPC) reacted swiftly by reducing the policy
repo rate by 115 bps cumulatively in a span of two months (March-May
2020). Along with the rate cut, we infused significant quantum of
liquidity through both conventional and unconventional measures to
stimulate the economy, restore confidence and revive market activity,
while ensuring that our liquidity augmenting measures did not engender
future fragilities.5
7. Recognising the need for strengthening financial stability, the
Reserve Bank has taken a number of initiatives to revamp regulation
and supervision of Banks, NBFCs and other financial entities by
developing an integrated and harmonized architecture. The supervisory
approach is now geared to effectively address the root cause of
vulnerabilities and identifying any build-up of potential systemic risks.
We engage regularly with all regulated entities to identify incipient signs
of stress and deal with them at an early stage. We have been focusing
on constantly improving governance and the functions of compliance,
risk management and audit in banks and other financial entities.
8. The Reserve Bank is leveraging data analytics and carrying out
periodic off-site analysis to provide sharper analytical inputs to its on-
site supervisory teams. An Early Warning Framework has been
name
developed. A new SupTech initiative, with the DAKSH",
"दक्ष -
has been launched. A College of Supervisors (CoS) has been set up to
upgrade supervisory skills of the regulatory and supervisory staff.
Recently, we launched a Centralised Information Management System
or CIMS, which is our next generation data warehouse. Digital
Payment Security Control Guidelines have been issued to address the
-
risks in digital payment products. Guidelines for digital lending an
-
emerging area have also been issued. In fact, it will not be off the
mark to say that almost the entire regulatory and supervisory
architecture of the financial sector has been restructured in the last 4 to
5 years.
9. While pursuing these reforms, the Reserve Bank has also made
conscious efforts to improve systemic resilience and efficiency by
maintaining external stability and building forex reserves. The
development of vibrant financial markets has also been a key priority.
These reforms, among other things, seek to remove market
segmentation, facilitate greater access including non-residents, widen
the participation base, promote innovation, and ensure customer
protection. Measures have also been taken to put in place state-of-the-
art market infrastructure, pilot launch of central bank digital currency
(CBDC) and internationalisation of the rupee. The COVID crisis was
converted into an opportunity by harnessing the best benefits of
digitalisation.
10. Thanks to these and several other initiatives by the RBI and the
banks and other financial entities, India's financial sector remains
resilient and healthy. There is, however, no room for complacency. New
challenges and stress points keep coming up and all stake holders have
to be cognizant of emerging developments and associated risks.
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Indian Economy The Current Setting
11. As a backdrop to the building blocks for future growth, let me turn
briefly to the current macroeconomic scenario, starting with the global
environment. The global landscape is witnessing major structural
changes. The process of globalisation has slowed down and is drifting
from multilateralism towards bilateralism and geo-economic
fragmentation. Friend-shoring and reshoring have become more
pronounced. Global supply chains have been under pressure, which
along with rising global commodity prices contributed to multi-decadal
high inflation in 2022. The resultant aggressive monetary tightening has
dampened the global growth outlook. Tight financial conditions and
volatile capital flows are accentuating the impact of global slowdown on
the prospects of emerging and developing economies. Headline
inflation is now easing unevenly across countries but remains above
the target in major economies. The pace of monetary tightening has
been scaled down, but policy rates could stay higher for longer in
several countries. Even as the grim prospects of hard landing have
receded, global growth is likely to remain low by historical standards in
the medium-term. With increasing climate change risks, the
development of climate-friendly technology, new and renewable
sources of energy and sustainable agricultural practices would shape
our future. The pace of progress in these fronts need to be hastened.
12. Amidst such volatile world environment, India stands out as the
real gross domestic
emerging growth engine for the world. India's
product (GDP) recorded a growth of 7.2 per cent in 2022-23, surpassing
its pre-pandemic level by 10.1 per cent. Overall, the conditions are
favourable for the growth momentum to continue and the capex cycle
to gain momentum in 2023-24. Opportunities are now promising and
can be utilised to propel our economy to a higher growth trajectory.
13. The challenge of high inflation, however, still persists and has to
be effectively addressed. After reaching a low of 4.3 per cent in May
2023, headline inflation has risen to 7.4 per cent in July driven by the
surge in tomato and other vegetable prices. The July print which was
released after the MPC meeting was on the higher side compared to
our estimates. Prices of vegetables surged by 37.3 per cent (year-on-
year), led by an increase of 201.5 per cent in tomato prices. Reflecting
these drivers, food group inflation more than doubled from 4.7 per cent
in June to 10.6 per cent in July. On the positive side, inflation excluding
food and fuel (core inflation) has softened by around 130 basis points
from its recent peak in January 2023. Although it is still elevated at 4.9
per cent, this steady easing of core inflation over the last five months is
indicative of the ongoing transmission of monetary policy.
14. Looking ahead, the spike in vegetable prices in July is starting to
see a correction, led by tomato prices. New arrivals of tomatoes in
mandis are already softening prices, coupled with proactive supply
management in the case of onions. We expect to see an appreciable
slowdown in vegetable inflation from September. Meanwhile, the
prospects for kharif crops have improved, thanks to the progress of the
monsoon in July, although the cumulative rainfall has again moved into
the deficit territory.6 The outlook for cereal prices has accordingly
brightened, supported by active supply side interventions. Sudden
weather events, El Niño conditions and renewed geopolitical tensions,
however, impart uncertainty to the food prices outlook. As I noted in my
monetary policy statement on August 10, 2023, given the likely short-
term nature of the vegetable price shocks, monetary policy can await
the dissipation of the first-round effects of such shocks that may
produce short-lived spikes in headline inflation. We will remain on guard
to ensure that second order effects in the form of generalisation and
persistence are not allowed to take hold. The frequent incidences of
recurring food price shocks pose a risk to anchoring of inflation
expectations, which has been underway since September 2022. We
will remain watchful of this also. The role of continued and timely supply
side interventions assumes criticality in limiting the severity and
duration of such shocks. In these circumstances, it is necessary to be
watchful of any risk to price stability and act appropriately and in time.
We remain firmly focused on aligning inflation to the target of 4.0 per
cent.
Building Blocks for a Sustainable Future
15. Having provided a snapshot of the current context, I would now
like to turn to the certain thrust areas that can propel India forward over
the next 25 years. The potential is huge for India to raise its growth
trajectory and improve the general well-being of the people. In this
context, I would like to focus on six key areas that can provide the
required growth momentum. They are (i) agriculture; (ii) manufacturing;
(iii) services; (iv) demography; (v) technology; and (vi) start-ups. In all
these areas, we already have certain comparative advantages which
should continue to be exploited to push our growth frontier further. Let
me now touch upon these areas one by one.
(i) Agriculture
Despite having only 2.4 per cent of the world's land area, India is
16.
among the top five agri-producers globally7. Indian agriculture
epitomises enormous diversity with wide ranging agro-ecological areas.
India is not only self-sufficient in food production but is also net exporter
of foodgrains. Nevertheless, the agriculture sector in India faces
challenges of productivity gaps, shifting preferences and sudden
weather events. All these require heavy investments in infrastructure
and innovation to modernise the sector and realise its true potential in
terms of achieving higher productivity, providing more efficient access
farmers' income. As a nation we must find
to markets and maximising
a way of carrying out the much needed agricultural reforms, especially
in the area of agricultural marketing and the connected value chains.
These reforms are critical not only for sustained high growth but also
farmers' income,
for durable price stability and to mitigate the frequency
and intensity of food price shocks that we have seen in the recent
months. Policies towards setting up and improving cold chains and
storage facilities, mega food parks and food processing units are steps
in the right direction to reduce wastage and improve value addition in
the agriculture sector.
(ii) Manufacturing
17. The manufacturing sector plays an important role in economic
growth due to its specific characteristics like economies of scale,
backward and forward linkages and integration to global supply chain.
Manufacturing is also one of the largest consumers of services, making
the two sectors complementary to growth. Contrary to the conventional
growth paradigm in which an economy transitions from agriculture to
manufacturing and then to services, India has directly leapfrogged from
an agrarian to a service-led economy. As a result, the share of the
manufacturing sector in gross value added (GVA) has remained
stagnant at around 18-19 per cent.
18. In the changing landscape of the manufacturing sector,8 India
has the potential to capitalise on emerging areas such as aerospace
and defence, low-carbon technologies, electric vehicles and
semiconductors. India has initiated reforms to build manufacturing
prowess in emerging areas, including electric vehicles and
advancements in lithium recycling capabilities. In this regard, ongoing
mining reforms to sustainably exploit available mineral resources in the
country need to be fast tracked. Overall, it is vital to adopt a holistic
approach to improve infrastructure, technological adoption, training and
skilling of the workforce, and digital advancements.
(iii) Services
India's emergence as one of the fastest growing economies in
19.
recent decades is largely attributed to the rapid growth of its services
sector. The contribution of services to gross domestic product (GDP)
has been more than 60 per cent since 2014-15. India emerged as the
7th largest services exporter globally in 2022, up from 21st position in
2001. India has played a leading role in establishing global service
networks and has become a global hub for information technology (IT)
and business process outsourcing (BPO) services. Newer opportunities
India's
have been harnessed to improve participation and
competitiveness in global value chains (GVCs).
20. Service industries like tourism, education, telecommunications,
utilities and health care can generate significant employment
opportunities. Activities like road transport and construction services
have the highest backward and forward linkages along with high
employment intensity. These services have received a boost after the
introduction of GST.
India's business services exports are growing
21. rapidly, owing to its
status as the preferred destination to set up Global Capability Centres
(GCCs) by multinationals.9 The development and provision of services
such as internet infrastructure, cloud computing, and data analytics are
vital in supporting the digital transformation and growth of various
industries. India is well-positioned to leverage these opportunities and
cater to more skill-intensive and increasingly digitalised services.
(iv) Demography
22. India accounts for around 67 per cent of the global working-age
population,10 and is expected to add another 183 million people to the
working age over the next three decades. The median age for India is
expected to be a little over 30 by 2030.11 Given this demographic
advantage, India would be a significant source of human capital amidst
anticipated shortage of labour supply globally, and also a thriving
market capable of adapting to evolving demands for goods and
services. This can lead to an improved growth differential in favour of
India's relative size in the global economy. The
India and increase
evolving demographic profile is also expected to lead to a substantial
increase in the quantum as well as quality of remittances. Over the
there has been a gradual structural shift in Indian migrants' key
years,
destinations from largely low-skilled and informal employment in the
gulf countries to a dominant share of high-skilled jobs in high-income
countries. Inward remittances have scaled record peaks to reach US$
112.5 billion in 2022-23 and accounted for around 3 per cent of GDP.
Going forward, labour market transformations driven by technological
breakthroughs, energy transition and geo-economics are going to be
significant forces to offer cross-border benefits to India from its migrant
population.
23. Improving the labour force participation rate, especially of women,
is critical to realise our full potential.12 There is a need to invest in
education, skill development, and healthcare to capitalise on our
demographic advantage. Continued and greater focus on innovation
and social sector infrastructure could increase labour productivity,
India's potential growth and per capita income.
(v) Technology
24. With the world on the cusp of a technological revolution, the time
is opportune for India to establish itself as a digital-economic
powerhouse. Technological advancements have not only enabled
virtual education, remote work, and contactless sales during the
pandemic years, but also aided efficient public delivery and acted as a
positive shock to overall productivity growth.13
25. It is important for Indian businesses to take the lead in rapidly
adopting frontier technologies like artificial intelligence (AI), Internet of
Things (IoT) and Big Data. Combined with the presence of a young and
skilled workforce, a dynamic and nimble ecosystem and strong public
digital infrastructure, this can set in motion a virtuous cycle of growth
for Indian businesses. This decade has been described as India's
'Digital Decade', with the country poised to reach a US$ 1 trillion
consumer internet economy by 2030.14
26. At the Reserve Bank, we strive to constantly improve and offer all
users safe, secure, fast, convenient, accessible, and affordable e-
payment options. The Reserve Bank has been at the forefront to
facilitate safe and inclusive growth in the digital financial sector.15 The
UPI has been recognised as the fastest growing retail payment system
in the world and many countries have expressed interest in having a
UPI-like platform. Together with the National Payments Corporation of
Bank's
India (NPCI), the Reserve initiatives in linking UPI with the fast
payment systems in Singapore, Bhutan, Nepal, the UAE and several
other countries demonstrate the huge potential of UPI in the years to
come. The availability of RTGS on a 365x24x7 basis has helped in
reducing the settlement and credit risks in the payments ecosystem.
This feature was introduced in the middle of the COVID-19 pandemic.
(vi) Innovation and Start-ups
27. Innovation is a key driver of long-term economic growth. The
recent breakthrough in Artificial Intelligence (AI), not by a BigTech
company but by a start-up, i.e., OpenAI, speaks volumes about the
power of start-ups in ushering in technology driven economic
prosperity.16 The start-up investment outlook in India remains positive.
It is encouraging that many start-ups are focused on small and medium
businesses, financial inclusion, access to affordable healthcare, better
education and higher earnings as their core value proposition17.
28. The time is now ripe for targeted development of start-ups in high-
tech domains such as quantum computing, small modular reactors
(SMR), AI-based defence equipment, biotechnology, rare earths
extraction, battery technology, oceanography and space exploration.
The start-up ecosystem that encompasses these sectors needs to be
promoted to hasten the progress of the country.
Concluding Observations
India's growth narrative
29. Let me now conclude by saying that as
changes from caution and watchfulness to optimism and exuberance,
it is now India's time
to make a mark in the emerging global economic
captures India's potential in an
landscape. A recent media article aptly
article titled: "The global economy needs a new powerhouse. India is
stepping up".18 The need of the hour is to make concerted efforts in the
areas outlined in my speech today and also a few other areas to lay the
foundations of this new powerhouse - India - which is destined to grow
in size, confidence and inclusiveness.
Thank you. Namaskar.