1991 – 92, review the economic progress made so far and then conclude with some reflections on policy challenges in the way forward. policy reforms post - 1991 macroeconomic crisis of 1991 marked a turning point in india ’ s economic history for two reasons. first, fiscal deficit driven external payment crisis with a dip in foreign exchange reserves to below us $ 1 billion in july 1991 drew a crisis resolution strategy to restore macroeconomic stability. sharp correction in fiscal deficit - gdp ratio and reduced monetisation of deficits contributed towards restoring macroeconomic balance by the mid1990s. the reduced dependence of fisc on monetisation enabled the reserve bank of india to reduce its statutory pre - emption of funds from banks, thereby freeing resources for the private sector. second, simultaneously efforts were made towards wide ranging structural reforms encompassing areas of trade, exchange rate management, industry, public finance and the financial sector. an abiding objective in respect of industrial policy measures since then has been to create a competitive environment to improve productivity and efficiency. new industrial policy fostered competition by abolishing monopoly restrictions, terminating the phased manufacturing programmes, freeing foreign direct investment and import of foreign technology and de - reservation of sectors hitherto reserved for the public sector. these bis central bankers ’ speeches measures created a favourable environment for industry to upgrade its technology and buildup its capacity through imports in order to cater to growing domestic and external demand. at present, only five industries are under licensing, mainly on account of environmental, health, safety and strategic considerations. only two industries are reserved for the public sector, viz, atomic energy and railway transport. reservation of industrial products for the small scale sector is still a lingering issue. however, the definition of small scale industry ( ssi ) has been changed to facilitate modernisation and now only 20 items are reserved for manufacturing in the small scale sector. foreign direct investment ( fdi ) up to 100 per cent is allowed under the automatic route in most sectors, with a few exceptions. the infrastructure sector has been thrown open to the private sector. considering the large requirements of funds for infrastructure, 100 per cent fdi has been allowed in all infrastructure sectors. there are extended tax holidays to enterprises engaged in the business of development, operation, and maintenance of infrastructure facilities. the emphasis has been on public - private partnership ( ppp ) as one of the preferred modes for infrastructure project implementation. comprehensive fiscal reforms covered tax reforms, restructuring of public sector undertakings and improving fiscal - monetary coordination before

. at any given point in time, priorities may differ somewhat, but the overall framework is one of co - ordination. we have said in our policy that the government should bring the fiscal situation under control. would you accuse us of backseat driving? next year, private sector loan demand will pick up, while government borrowings will remain around the same level and inflows are expected to rise. so, will it be one of the tougher years from the policy making perspective? there is some notion of a trend rate of growth, say, in the 8 – 9 per cent range. if the economy grows beyond that trend, that is overheating. we cannot remain over the trend for a long period of time without stoking inflationary pressure, for the simple reason that the economy does not have the capacity to grow faster than that rate. if the factors you are talking about take the economy above the trend, the risks of overheating develop and from a macroeconomic stability perspective, we have to address those. our focus is on whether this is being done within the overall capacity of the economy to sustain that growth rate. if growth is above trend, we need to find ways of dampening. there is some difficulty, of course, in identifying what the sustainable trend is in such a dynamic and volatile environment. this is an ongoing analytical objective. this is your first monetary policy. what are your first impressions about rbi? the process is very intense and the amount of information and analysis that comes in is much larger than i appreciated as an outsider. what i have discovered is that the density of information and the amount of processing is huge. so, the confidence in the correctness of the decision is far more than it would have been, based on the data that i had available to me on the outside. it ’ s an extremely consultative process, both internally and externally, with rbi staff from many departments, banks and other market participants. the rigour of the process was a revelation ; i did not appreciate it from the outside.