growth. however, the ability of banks to play this vital role is constrained by their lack of reach across a large segment of the population on account of financial exclusion. financial inclusion and the consequent increased penetration of banks to the hitherto unbanked segments, thus, have strong linkages to economic growth. growth through financial inclusion : historical perspective 5. the criticality of the financial sector in ensuring equitable and sustainable development was realized quite early in the post - independence period and there was a focus on channeling credit to the neglected sectors of the economy and weaker sections of the population. increasing access to credit for the poor has remained a core concern for india ’ s planning architecture, in its fight against poverty. having recognized the social and economic imperatives of broader financial inclusion early, the policy makers set about finding innovative ways to empower the poor. starting with the nationalization of banks ( 1969 / 1980 ), outlining priority sector lending requirements for banks, introduction of the lead bank scheme, establishment of regional rural banks ( rrbs - 1975 – 76 ), service area approach ( 1989 ) and self - help group - bank linkage programme ( 1989 – 90 ), all these initiatives were taken with an underlying objective of taking banking services to the masses and making them participate in the developmental process of the economy. the financial sector reforms, set in motion in the 1990s, saw the focus shift to strengthening financial institutions and bringing in new players to infuse competitiveness, with the ultimate objective of achieving enhanced financial access, greater efficiency and improved consumer satisfaction. these initiatives, undoubtedly, had a positive impact and resulted in some improvement in access of banking services to remote parts of the country. however, since these initiatives lacked a structured and coordinated approach, the developments were rather skewed with few regions witnessing better financial access and inclusion than others. the skewness in financial development across regions could mainly be attributed to poor polices as well as inadequacy of governance framework. the lack of formal structure and effective coordination in the financial inclusion initiatives, thus, contributed to regional disparities in growth and economic prosperity. good governance : an essential pre - requisite 6. the vision of inclusive growth and governance dictates the need to broaden and deepen access to development finance for all. only well functioning and efficiently governed financial institutions can provide financial services to meet the growing needs of the economy. despite early recognition of the need for universal financial inclusion, a large cross -

. “ might it be the case that economics is suffering from too much inbreeding? economists all read the same books, browse the same journals and use the same data because that is what gets professionally rewarded. and that inevitable leads to “ group think ” and all the associated follies. applying economics to real world policy 28. while i have spoken about the follies of economics, i am hardly suggesting that we can do away with economics. indeed economics needs to be pursued as an academic discipline even more vigorously but we need to be more intelligent and aware in translating textbook economics to practical policy making. in applying economics to practical policy, a sound economic background is necessary. models too are needed to capture the complexities of the real world. but these are not sufficient. in making economic decisions, practical policy makers need to superimpose judgement on the inferences thrown up by analysis and models. i want to illustrate this by presenting to you the rationale behind the reserve bank ’ s calibrated exit from the expansionary monetary stance of the crisis and the policy dilemmas that we confront. calibrated exit from expansionary monetary stance 29. not unsurprisingly, emerging market economies ( emes ) recovered from the global crisis sooner than advanced economies – an outcome attributable in part to the relatively limited exposure of their banking systems to tainted assets and in part to the self - insurance they had built up through foreign exchange reserves. india ’ s recovery 30. on the recovery trail, india has been an outlier even compared to other emes. our recovery has been swifter reinforcing the fact that the drivers of our growth are largely domestic. we have been an outlier on the inflation front as well. even as most advanced economies were flirting with deflation, price pressures caught up with us and headline inflation started inching up. 31. sensing our unique growth - inflation dynamics, the reserve bank began managing market expectations by signalling the need to exit from the crisis triggered expansionary stance even as the rest of the world was still struggling with crisis management. ironically, we had to begin this messaging about exit as early as august 2009, when our headline inflation was still in the negative territory and some analysts were even talking about a risk of deflation. october – december 2009 32. sure enough, wpi inflation surfaced into positive territory by september 2009, and soon started increasing. even as the reversal owed partly to the base effect, inflationary pressures were