Duvvuri Subbarao: Impact of the global financial crisis on India -
collateral damage and response
Interview by Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, with Claire Jones,
Editor, CentralBanking.com, published in London, 2 July 2009.
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Central Banking (CB): You are a highly-respected civil servant who has spent a
significant portion of your career in various government departments. How does
heading the Reserve Bank of India compare?
Duvvuri Subbarao (DS): As a career civil servant for 30 years, I have worked at the district
level, the state level and the national level. I also worked at the World Bank, and now
towards the end of my career it is a privilege to come to the Reserve Bank of India.
I've also been fortunate to work for a long period in the area of public finance. The Reserve
Bank is different from what I did before as a civil servant in terms of work content and
accountability mechanisms.
Work content is of course the quintessential central bank work which is a much narrower
canvas than many of my assignments as a civil servant. The responsibility is of course much
larger, and accountability as the governor is at an individual level as opposed to
accountability at an aggregate level in civil service jobs.
In a typical ministry, a civil servant would be responsible to the minister. And the ministry
itself would be accountable to the government. As the governor, I am responsible at an
individual level and I am hoping that my experience in the real sector would be an advantage
in my current position as governor.
CB: And do you think that experience has proven useful so far?
DS: Yes, I would think so. As we went the crisis and distress signals kept coming, I had a
good understanding of what was causing the distress. That made me better equipped to
respond to the crisis.
For example, in the wake of the crisis exports were hit: in India certain sectors are more
export-centred than others, for example, textiles and gems and jewellery. Similarly, there are
certain geographic locations that are more reliant on exports than others. My experience in
the real sector made our responses better, more grounded in these realities.
CB: Do you have a clear agenda for what you want to achieve during your first
threeyear term?
DS: India achieved growth of 9% over the four years to 2008, and the crisis clearly came as
a setback to us. Last year (2008-09) the growth rate was 6.7%. This was certainly better than
most people had expected, but evidently lower than trend growth. For me, the single most
important objective is returning the economy to a high growth path.
CB: So that would imply that you believe growth of 9% to be achievable in the medium
term?
DS: Yes, of course. The challenge for the Reserve Bank will be to create the stage for a 9%
growth in an environment of price and financial stability.
CB: Do you think that concentrated wealth could hinder medium term growth as a
recent ADB-sponsored report has found?
DS: I have not seen the ADB report but I do know that reducing disparity across regions has
been one of the key objectives of the government. At the heart of the 11th Five-Year Plan is
inclusive growth, and that aims to address precisely the issue of narrowing disparities.
CB: So you'd broadly concur with the finding that concentrated wealth could hinder
the achievement of trend growth of 9%?
DS: I know that higher growth in India cannot be meaningful unless the gains of growth are
distributed more widely.
CB: If there were three things that you could achieve in your first three years, what
would those three be?
DS: First, I would like the RBI to acquire greater proficiency in managing monetary policy in a
globalised context. India is going to become more and more integrated. And we are going to
be impacted by what's happening around the world.
Second, we have to make the RBI more transparent. We need to improve communication at
both technical and non technical levels.
Third, at a very personal level, I would like to de-mystify the office of the governor. What I
mean by this is that I want our staff to understand that even governors do not know
everything, that they have to make judgement calls in a context of uncertainty when the pros
and cons of their actions are not completely clear. I want them to understand that they will
serve me better by disagreeing with me and telling me what to do rather than trying to
outguess me. I want them to understand that the Governors do not know everything and that
they should feel free and comfortable about speaking up.
CB: The Reserve Bank of India is now in its 75th year. How does the Reserve Bank
plan to mark this anniversary?
DS: Our plans are still somewhat fluid and I expect that we will look ahead as we look back.
It's my privilege to be heading the RBI at such an historic moment. First of all, I want to say
that the RBI has earned an enviable reputation for competence, for its professionalism and
its integrity.
We will of course be having events to commemorate the anniversary. But what I do want to
do is to use the jubilee as an occasion to have RBI understand that they must make a
difference and I want the people of India to understand that the RBI does something that's
important in their daily lives. I want our staff to understand that they can make a difference.
CB: Looking back on the Reserve Bank's first 75 years, are there any lessons from
history that the institution could usefully apply in the current circumstances?
DS: I'm afraid I'm not a student of history but 75 years is a long time and there are certainly
lessons from our experience. The central bank has performed the role of being an effective
counterpoint to government which often has to concentrate on short-term objectives. On its
part, the Reserve Bank has been able to take a medium-term view and what is prudent and
optimal comes out of this synthesis. We should continue to do that.
RBI has had a culture of gradualism, moving forward decisively but only after weighing
carefully the pros and cons. It's like the crossing a river by feeling the stones metaphor.
Moving forward we need to understand that monetary policy is going to be more difficult
because of the increasing forces of globalisation. As I mentioned earlier, we need to acquire
greater proficiency in that.
CB: Where do you believe your views differ from those of your predecessor, Y.V.
Reddy? Where are there similarities?
DS: Dr Reddy is an eminent economist who has served the RBI with dignity and distinction.
He's a difficult act to follow.
We are similar in that our aims are to keep the economy on a high-growth path with price
stability and increasingly, financial stability.
However, the difference between him and me will be the specific circumstances that we
encounter when we try to deal with that mandate.
Dr. Reddy has had to deal with two episodes of inflation, one demand driven and the other
supply driven. He has also had to deal with a flood of capital flows. I have had a baptism by
fire, taking over at a time of crisis, where I've had to act quickly. It has been a steep learning
curve.
CB: Do you feel that the Reserve Bank of India's relative scepticism towards inflation
targeting has been vindicated by recent events?
DS: Yes, to a large extent. Because, in India, inflation is influenced by a number of factors
besides excess demand in the context of easy liquidity. We're an import-dependent economy
that is reliant on importing commodities. So, import prices can drive up inflation. Capital flows
could impact inflation. Decisions by other central banks could also cause inflation, especially
in a globalising world. In a crisis such as this, inflation could also come through the trade
channel. Also, India is largely an agricultural economy, even though agriculture now
accounts for less than 20% of GDP. So, our agriculture prices are vulnerable to monsoon
and adverse weather conditions, and beyond the pale of monetary policy action. Because of
this, inflation targeting is neither possible nor advisable for the Reserve Bank.
CB: You've said that you're unconcerned that there is a threat of serious deflation
despite wholesale prices being in negative territory. Can you go into a little more
depth on why you hold this view?
DS: WPI inflation went into negative territory two weeks ago and remains there. Given the
talk about deflation around the world, especially in the advanced economies, there has been
some concern in India whether what we have is a structural deflation. It is important for the
central bank to communicate the message that this is not a structural deflation and that what
we are seeing is purely statistical in its nature.
The WPI went into negative territory because a year ago, at this point of time, the
administered oil prices were raised. Our negative inflation does not reflect a demand
constraint. Far from it. We are a supply-constrained economy not demand constrained.
Negative inflation has also triggered speculation about further rate cuts. I want to reiterate
here that the Reserve Bank looks at a number of indices, including the WPI, the four indices
of CPI. We also look at the inflation expectations survey that we do. So I want to reiterate
that the current temporary negative inflation is not structural in nature, but rather it's only
statistical.
CB: In an article written for The Banker, published 5 January, you wrote: "It was not
supposed to happen this way. The decoupling theory was supposed to kick in." Why
did it not?
DS: The decoupling theory held that because of the substantial rise in foreign exchange
reserves, the improved policy framework, robust corporate balance sheets and a relatively
healthy banking sector, emerging economies could steam ahead on their own even if
advanced countries went into recession.
The reality turned out to be otherwise. We've seen in the last several months capital flow
reversals, sharp currency depreciations, and a widening of spreads on both corporate and
sovereign debt. The decoupling theory was never totally persuasive in a globalising world
and its credibility has been seriously dented by the events of the past few months.
We should now have a modified decoupling theory which is that if the downturn in advanced
economies is relatively mild, then emerging economies could do enough through policy
responses to insulate their economies. But if the downturn is severe, they will be impacted, of
course differently in different economies.
Again, India has not been able to decouple through this crisis not so much because demand
collapsed, but because we have been impacted through the finance channel and through the
confidence channel. Because capital flows, which have been larger than our current account
deficit over recent years, have substantially declined in the wake of the crisis.
CB: Do you think that scenario would change if domestic consumption in the likes of
India or China was boosted?
DS: I can't comment on China. But as far as India is concerned, our consumption at 57% of
GDP is relatively high for an economy of our per capita income level. So the important thing
for India is to increase investment, especially in infrastructure, and not so much consumption.
I admit that private consumption has to go up as indicator of poverty reduction, but what is
more important is that investment increase.
CB: Could you clarify your position on the stability of the current international
monetary order?
DS: I have studied the debate about the dollar as the reserve currency, whether there could
be alternatives to that, what are the implications for the world economy and for emerging
economies. At this time I'm not sure if there is a currency that can replace the dollar. In any
case, replacing the dollar can't happen by fiat. It has to happen on the strength of that
alternate currency. But I do want to say that in terms of the international monetary order, we
are facing a situation where finance is globalised, but we still have regulation at the national
level. We need to look at the implications of this for monetary policy, especially for countries
with fixed exchange rates and for emerging economies.
It's also important to focus on global imbalances. If we accept, as seems to be the current
consensus, that these imbalances were one of the structural causes of the crisis, and given
that you cannot have a world without imbalances, what can we do to ensure that the world is
in a better position to minimise imbalances, and to the extent that they exist, to manage
them.
CB: What do you think is the right forum in which to conduct this debate?
DS: Several international fora are appropriate. There is the IMF, the BIS's bi-monthly
meetings and the very effective G20. Important topics such as this must be discussed at all
these fora. And I believe that they are likely to be discussed for much longer than we think
before we reach an agreed view on a minimum acceptable programme.
CB: The first official summit of BRIC leaders recently took place in Russia. How do
you view the relationship between yourself and your Brazilian, Russian and Chinese
counterparts?
DS: As a first point, BRIC is a Goldman Sachs acronym that emerged out of some similarities
between the Brazilian, Russian, Indian and Chinese economies, which are growing rapidly
and have an increasing influence on global growth. Since Goldman Sachs came up with that,
these economies have had different developments, including in terms of the impact that the
crisis has had on each of them. It has been useful for central bank governors and finance
ministers to meet at international fora to have a shared understanding on some of the issues
that are common to us, such as a common minimum programme on regulation, the
management and the governance of Bretton Woods institutions.
CB: I see your point about BRIC being a construct of Goldman Sachs, but I've also
heard people say that if it didn't exist then somebody would have to invent it.
DS: I would think that there are enough similarities that it is worthwhile discussing policy
responses together. Not on all issues. But to the extent that we are seen as large,
highgrowth countries, and as contributors to incremental global growth, we have issues in which
we have a common interest. It is not as though we must have a common view on every issue
that emerges in international fora. But I believe that the consultation has so far been value
adding.
The four of us saying something collectively has absolutely more clout than if we say the
same thing separately. Even if there is an understanding that we have differences, is itself
value adding.
CB: Is there anything else that you'd like to mention?
DS: One issue that has come up in India in the context of the crisis is why we are not doing
everything that other central banks around the world have been doing. Our response has
been that even as the origins of the crisis have been common, the evolution of crisis and its
impact has been different across countries. Countries have had to respond to the specific
situation in their countries. In the advanced economies, the transmission of the crisis has
been from the financial sector to the real sector. In contrast, in a number of countries
including India, the transmission of the crisis has been from the real sector to the financial
sector and iterations thereon. While we have studied and reflected on the responses of other
countries, our policy action has been tailored to the Indian situation and aimed at minimising
the impact of the crisis. This has meant both conventional and non-conventional policy
action.
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