duvvuri subbarao : interview with the wall street journal interview with dr duvvuri subbarao, governor of the reserve bank of india, in the wall street journal, conducted by alex frangos and originally published on wsj online on 13 february 2012. * * * the transcript can also be viewed at http : / / online. wsj. com / article / sb10001424052970204795304577221253451295374. html reserve bank of india gov. duvvuri subbarao sat down with the wall street journal to talk about his efforts to restart india ’ s growth engine and to fight persistent inflation. speaking from the 18th floor of the reserve bank headquarters overlooking mumbai, mr. subbaro touched on a range of issues, including the rbi ’ s efforts to stabilize the plunging rupee in late 2011, his calls for cuts to government spending, and how it was difficult to increase interest rates several times over the objection of a panel of advisors. following is an edited transcript of the conversation : wsj : what is your monetary policy stance right now, are you easing credit conditions or are you in neutral? subbarao : it ’ s difficult to say what is neutral. but we give guidance in our quarterly policy statements in october and again in january, which is to say that the tightening has peaked, and from here onwards, it ’ s that we ’ ve got to come down, that we have to start easing. there was some question as whether the crr ( cash reserve ratio ) cut we had done in the january policy was a signal of easing. it depends on how you interpret that. but historically the reserve bank has viewed the crr as a monetary policy instrument with of course liquidity dimensions. so it was both to signal that the interest rate cycle has peaked and also to infuse liquidity. wsj : so was it easing or not? subbarao : i would say it was easing to the extent we had eased the liquidity situation and we viewed the crr as a monetary policy instrument. wsj : you got applause for holding the government ’ s feet to fire on the growth in the fiscal deficit in your january policy statement, saying such spending is fueling inflation. you have talked about this issue in the past, but never so pointedly. critics say you should have done so earlier. what ’ s your

the sufficient condition to actually achieve growth. third, what are the possible ideas and policies that can put india ’ s growth back on a sustainable path. fourth, what the business community and financial markets can do to recoup india ’ s failing growth levels. of course, these thoughts are not final words, but a mere conduit to stimulate more ideas and thinking. i am sure that iim ahmedabad, known globally as an institution par excellence in business education, would be able to add many more ideas to the debate i intend to initiate today. 3. how do ideas matter for growth? we all know that ideas lead to inventions like the steam engine, which in turn sparked the industrial revolution. however, ideas need not necessarily result in inventions or discoveries. simple managerial innovations can deliver productivity enhancements, which could form the basis for growth. let me elucidate. ideas matter for growth 4. the fact that ideas have driven the largest economic expansions is ingrained in our economic history. ideas originating from the need for meeting basic human wants such as food, clothes and shelter propelled mankind ’ s first forays into organized economic behaviour at the time of the great river - valley civilisations that prospered around the nile, the tigriseuphrates, the huang - ho and the indus valley, starting around 3300 b. c. 5. the industrial revolution of the 18th century was another example of clustering of ideas that set the stage for rapid economic advancement. inventions and innovations such as the steam engine, iron and textile manufacturing that led to the origin of modern – day bis central bankers ’ speeches factories and the corporate system transformed not just the british economy but expanded over time to cover the rest of the world as well. these ideas may have resulted in inventions that drove technological advancements but these were much more than mere inventions. these were actually a series of ideas that fed into one another in the form of an interface amongst ideas. for instance, the steam engine would not have been possible without advancements in smelting and refining techniques of new ores and fuels that led to economic use of coal. this in turn led to advances in the chemical industry, which threw up a range of consumer goods such as soap, glasses, etc. also, these technological changes spurred political, social and cultural changes leading to changes in the way of thinking. the european society that once could not tolerate copernicus and galileo, began to cultivate a scientific temper and