Y V Reddy: India at 60 in a changing world - the next 20 years
Address by Dr Y V Reddy, Governor of the Reserve Bank of India, at the London School of
Economics and Political Science, London, 15 October 2007.
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Mr. Chairman, distinguished speakers and friends
On behalf of the Reserve Bank of India (RBI) and on my own behalf, I would like to express
our deep appreciation to LSE and, in particular, to Mr. Howard Davies, the Director, for his
initiatives in establishing the India Observatory (IO). RBI is doubly privileged to be associated
with the IO, as a partner, since it is in honour of Dr. I.G. Patel, one of my distinguished
predecessors, and also because the economic policy departments in RBI hope to benefit
immensely from the new research network. Further, deepening the relations with LSE is of
special significance for India since London is the most prominent global financial centre.
India at 60, is both old and young. It has a great heritage and history of more than three
millennia, yet the independent India is very young, aspiring to remove poverty and bring
dignity to all of the billion of its people by achieving an inclusive and rapid growth.
What has been the record of India's performance in 60 years?
Independent India exhibited more impressive price stability than most of the developing
economies. The inflation rate was, on an average, in single digit for 43 out of 57 years since
1950, and on most occasions, the provocations for higher inflation rates were external or
domestic shocks, such as oil prices or monsoon conditions. The record of RBI in maintaining
price stability, in terms of what is currently known as "core inflation", is thus noteworthy.
On growth rate also, the record is one of a self-accelerating growth, which was, to some
extent, enabled by RBI. The average annual GDP growth in the decade of 1950s was 3.6 per
cent, in 1960s it was 4.0 per cent, in '80s it was 5.6 per cent and in '90s, excluding crisis year
1991-92, it was 6.3 per cent. The problem decade was the '70s and the problem year, due to
the Gulf crisis, was 1991-92, when the GDP growth rates were 2.9 per cent and 1.4 per cent
respectively. In the new millennium, the GDP growth rate accelerated to 6.9 per cent and in
the last four years (2003-04 to 2006-07), it averaged 8.6 per cent.
The impressive growth performance since 1990s was possible due to the strong foundation
of an indigenous industrial base, domestic entrepreneurial class, knowledge enhancing
institutions, and improvement in vertical social and economic mobility during the decades
1950s to 1990. The recent growth dividend is not just a miracle of the marketisation, but is
built on decades of conscious nation building since independence, and the extension of
RBI's mandate during the period, inter-alia, to building of institutions and improving their
delivery capabilities.
In terms of financial stability, India remained resilient to a series of crises faced by several
emerging markets, because of careful pacing and sequencing of economic and financial
sector reforms. In the external sector, India has come out with a clean track record, having
met all payment obligations in time, even by pledging gold, a cherished national reserve of
sentimental value, when it became necessary in 1991 due to liquidity crisis. Yet, both sectors
have not only become reasonably efficient and resilient but are also in alignment with global
best practices.
In the current debate on macro-imbalances of global economy, India does not figure at all as
a contributing source, since our Saving-Investment as well as domestic-external demand
balance in the economy are by and large appropriate.
RBI's policies increasingly recognise global developments, but their adaption to such
developments, in the Indian context, is tailored to the prevailing status of institutions and
markets, immediate relevance and the evolving needs of the country. As an example, the
function of financial supervision continues with RBI, but in 1994, this function attained a
semi-independent status through the establishment of an overseeing authority in the Board
for Financial Supervision - but within RBI.
What is the outlook for the next 20 years?
Prospects for next 20 years, in our view, are bright for all the reasons and the record of
performance that I have given. Yet, there are several challenges that are to be met in the
medium term, as articulated in the recent Annual Report of RBI, which reflects the views of
eminent Directors on its Board. Permit me to list these challenges briefly. These are growth
of agriculture sector, improvement in physical infrastructure, fiscal empowerment to enhance
coverage and quality of education and health, improvement in governance and further
reforms in financial and external sector.
The financial sector reforms are aimed at further development of financial markets, especially
bond market, enhancing integration of these markets and further improvement in the banking
sector. In particular, determined emphasis on financial inclusion, financial literacy and credit
counselling is appropriate and, therefore, should continue. In the external sector, the
approach is towards fuller capital account convertibility, with focus on the enabling conditions
for minimizing the risks and maximizing the benefits.
Are we reasonably confident that we can meet the challenges and maintain the present
growth momentum with stability?
There are grounds for optimism and these include democratic values, financial system
stability, skilled manpower, technological capabilities, demographic dividends, large and
growing entrepreneurial class, and penchant for innovation. The single most critical
determining factor for the future would, by all accounts, be the improvements in governance
that impacts personal security, property rights, business environment, and above all, a sense
of fairness in the conduct of public policy.
India and LSE
Before concluding, I would like to recall that many distinguished Indians benefited from
education at the LSE. The most prominent, of course, are Dr. B.R. Ambedkar, the architect of
the Indian Constitution and an eminent economist, and Mr. K.R. Narayanan, a reputed
diplomat and former President of India. In a way, India might have, perhaps, repaid its debt
through Dr. I.G. Patel, who steered the LSE, as its Director, during a critical period. Now,
India and LSE are entering a period of productive partnership, in which RBI is privileged to
play an active role.
Let me thank all those assembled here for participating in the launch of the India Observatory
in the LSE.