duvvuri subbarao : economic crisis and crisis in economics – some reflections m ct m chidambaram chettyar memorial lecture by dr duvvuri subbarao, governor of the reserve bank of india, at the indian institute of science, bangalore, 27 august 2010. * * * m. ct. m. chidambaram 1. thank you for this kind invitation. it is a pleasure and privilege to deliver the m. ct. m. chidambaram chettyar memorial lecture honouring one of the most eminent entrepreneurs and financiers of the early twentieth century. 2. the chettyar community of tamil nadu has made impressive contributions to our national life. the stereotype view is that the chettyar community is conservative. but shri m. ct. m. chidambaram broke that stereotype. his is the story of a visionary, ahead of his time who, through his thought and action, contributed to laying the foundations for transforming india from an agrarian society to an industrializing nation. 3. m ct, as he was popularly known, was a true pioneer who did not let the restrictive economic environment of his time restrain his abounding spirit of enterprise. he started the united india life insurance, the first national level life insurance company ; ventured into general insurance through the united india fire and general insurance company, established a bank – the indian overseas bank, and set up a large manufacturing unit – travancore rayon. m ct thought big. the lic building on anna salai in chennai that he built remains iconic even today never mind that taller skyscrapers have since come up. i can go on with the list. what is impressive about this remarkable man is that he accomplished all this in an era of controls and regulations, and that too in a tragically short life span of just 46 years. that all these institutions survive to date is a tribute to m ct ’ s enduring legacy. 4. m ct was quite the renaissance man who let his life and work be influenced by learning from across disciplines as well as from listening to a wide range of people. but as with any successful entrepreneur, in the end, he depended on his intuition and judgement – some may call it plain common sense – to determine his course of action. in that sense, m ct had unwittingly set a role model for policy makers. good policy makers should get all the technical inputs and advice, but ultimately need to super

of ndtl. 36. the growth - inflation dynamics changed markedly after the january 2010 policy review. economic recovery was taking firm hold as evidenced by expanding exports, improvement in industrial production and sustained increase in financing from banks and non - banks. on the other hand, there were distinct signs of the inflation process getting more generalized. information then available indicated that the contribution of non - food to wpi inflation ( excluding food articles and food products ) which was zero in november 2009 surged to nearly 50 per cent by february 2010. also, year - on - year non - food manufacturing products inflation, with a weight of 52 per cent in the wpi basket, which was ( – ) 0. 4 per cent in november 2009 rose sharply to 4. 5 per cent by february 2010 evidencing incipient demand side pressures. we determined that we had to act quickly before inflation expectations get further entrenched. accordingly, in an unscheduled and mid - quarter policy action, we raised the policy interest rates by 25 basis points raising the reverse repo rate to 3. 5 per cent and the repo rate to 5. 0 per cent. april 2010 and beyond 37. monetary theory tells us that if prices come under pressure because of strengthening demand, monetary tightening has to take place. but monetary policy does not offer a template for when to tighten, how to tighten and how much to tighten. this remains a judgement call. we face this dilemma all the time but did so most acutely during the annual policy review in april 2010. year - on - year wpi non - food manufactured products inflation had moved up further from 4. 5 per cent in february 2010 to 5. 4 per cent in march 2010 evidencing clearly that demand side pressures on inflation were strengthening. 38. to understand the demand side pressures in perspective, we need to go back two years to august 2008, a month before the global crisis struck. at that time inflation in the country was raging well above double digits. some of it was due to the unprecedented rise in global crude and commodity prices, but a significant portion of it was also due to sizzling growth in an economy that was structurally capacity constrained across the entire spectrum – infrastructure, agriculture, industry and services. then came the crisis and the monetary and fiscal stimuli in response. a part of the stimulus was aimed at supporting investment, and public and private infrastructure investment did indeed increase, but much of the stimulus ended up supporting consumption. this helped