most productive uses. the more efficient a financial system is in such resource generation and in its allocation, the greater is its contribution to productivity and economic growth. as resource allocation improves and real returns increase, savings would presumably respond and higher resource generation should result. thus, development of the financial system is essential to the generation of higher productivity and economic growth. i will structure my address along the following lines. first, i will explore in brief the impact of banking sector productivity on the rest of the economy. this is relevant in view of the fact that any discussion on productivity and efficiency issues in banking would need to be judged in conjunction with the level of financial development and other country - specific features. this will be followed by a brief review of banking sector reforms in india. the subsequent section will examine, in some detail, the trends in productivity and efficiency in indian banking. my concluding remarks will be in the nature of the way ahead on areas germane to this sector at the present juncture. 2. how does productivity in banking influence the rest of the economy? economic history provides support for the fact that financial development makes a fundamental contribution to growth. financial development helped in the promotion of industrialisation in developed countries by facilitating the mobilisation of capital for large investments. well - functioning banks or other financial intermediaries such as venture capital funds also spur technological innovation by identifying and funding entrepreneurs who are perceived to have the best chances of developing new products successfully and for implementing innovative production processes. recent research has provided robust evidence supporting the view that financial development contributes to economic growth. at the cross - country level, various measures of financial development ( including measures of financial sector assets, domestic credit to private sectors and stock market capitalization ) are found to be positively related to economic growth. other studies establish a positive relationship between financial development and growth at the industry level ( rajan and zingales, 1998 ). similarly, at the firm level, firms in countries with deeper financial development are able to obtain more external funds and thereby enabled to grow faster ( demirguc - kunt and maksimovic, 1998 ). a basic indicator of financial development is the contribution of finance - related activities to gdp. the share of real gdp originating from finance - related activities in india tripled from just around 2 per cent during the 1970s to around 6 per cent during the 1990s and further to 7 per cent during the first half of this decade. within the services sector, the share of finance rose from less than

labour function? how will the stronger labour market situation affect wage negotiations? at the may meeting we were also able to observe that the statistics received for the first quarter showed a slightly more strained labour market situation than we expected to see in february. employment had developed roughly in line with our forecast, while the labour supply appeared to have increased slightly less than expected. unemployment was therefore a little lower than we had predicted in the february report. shortages in the business sector continued to increase. but my assessment was nevertheless that there was still plenty of spare capacity, if not yet to the same extent as we expected in february. a further reason why we foresaw higher inflationary pressures was that the government ’ s spring budget bill appeared likely to stimulate demand slightly more, at least next year, than we had previously estimated. as i said earlier, i drew the conclusion from this that the repo rate needed to be raised more during the forecast period than we believed in the february report. but my assessment was that the economic picture on the whole had not changed so much that the repo rate needed to be raised immediately. inflation was low, and it appeared, as i saw it, reasonable to assume that it would rise fairly slowly. the reason for this was that there were still several factors holding back prices. i pointed out that the important thing was to balance the pace of the interest rate increases so that inflation does not accelerate more rapidly than expected, but so that growth in production and employment is not slowed down too soon. how these considerations will be transformed into a new interest rate forecast is something we will return to in our next monetary policy report in june. views on our interest rate path in conclusion, i would like to say a few words on the experiences thus far of publishing our own interest rate path. it is still too early to draw any definite conclusions about how this has functioned, but some reflections may be worthwhile. the debate after our monetary policy meeting in february, when we presented our own interest rate forecast for the first time, was very lively. this was not because we chose to raise the repo rate by 0. 25 percentage points – this decision was hardly discussed at all. what attracted attention was the fact that the forecast for the repo rate that we published differed from the average expectations prevailing at the time. this applied both to the expectations that could be interpreted from market pricing and to the average of the interest rate forecasts made by other forecasters. but there were also fairly substantial