for exporting sectors relative to nonexporting sectors. some studies also throw up evidence of an increase in the growth of labour productivity ( goldman sachs, 2007 and economic intelligence unit, 2007 ). thus, it is clear that micro structural reforms undertaken over the years have enabled continuing productivity gains, particularly in the manufacturing sector, with enhanced access of indian business to technology, increased competition, greater attention to research and development and other productivity enhancing activities. widening and deepening of the financial sector, along with improved regulation and supervision, has also contributed to improvement in productivity. an important challenge for the monetary policy authority is to judge the durability of the recent upsurge in growth. while there is some evidence, as documented, that the acceleration of growth has been supported by structural factors such as improvement in gross domestic saving and investment rates, productivity gains, the demographic dividend and capital accumulation including skill formation, it is important to disentangle the structural and cyclical components underlying the growth process. it is necessary to note that a cyclical upswing is also underway in india since 2003 - 04 after a prolonged trough which began in 1996. there is also some sense that this upturn is part of a synchronized global economic cycle which has seen five consecutive years of accelerated global growth. in the event of a judgment that the current growth momentum is more cyclical than structural, the stance of monetary policy would need to reflect a sensitivity to the inevitability of a downturn. on the other hand, the judgment that structural factors predominate would warrant a different policy stance. an overriding concern faced by the reserve bank is the persistently high growth of bank credit, with attendant worries relating to the quality of bank credit. in this context, the reserve bank has consistently emphasized diligent monitoring of the health of credit portfolios and non - performing assets, the need for counter - cyclical provisioning and sensitivity to risks. the sharp increase in credit to sectors such as housing, commercial real estate and retail loans have also been worrisome on account of the vulnerability of banks to credit concentration risks. the important question however relates to the sustainability of the credit expansion and its compatibility with the overall acceleration of growth. credit penetration in india remains low even by emerging economy standards ( table 9 ). consequently, growing financial intermediation could possible be reflected in high credit growth. the mid term review of october 2006 reported empirical evidence of a structural break in the evolution of the elasticity of bank

duvvuri subbarao : emerging market concerns – an indian perspective remarks by mr duvvuri subbarao, governor of the reserve bank of india, at the g - 30 international banking seminar, organized on the occasion of the imf - world bank annual meetings 2009, istanbul, 5 october 2009. * * * from the perspective of emerging market economies ( emes ) and particularly for that of india, i will highlight five concerns. these are : first, timing of exit from the accommodative monetary policy in the context of rising food price - led inflation but still weak growth ; second, the possibility of another surge in capital flows, especially if we turn out to be an outlier in withdrawal of monetary stimulus ; third, monetary transmission mechanism as it is evolving from the crisis period ; fourth, return to fiscal consolidation and quality of fiscal adjustment ; and finally, the implications of the efforts towards financial stability on financial inclusion and growth. unique features of the indian economy before i turn to these issues, i want to indicate a few features unique to the indian economy. these features, i believe, are important to appreciate my comments on emerging market concerns. what are the unique features of the indian economy that distinguish it from other emes? first, our growth is driven by domestic demand – both consumption and investment. consumption and saving are well balanced. in india, the share of private final consumption expenditure in gdp is around 55 per cent. our savings rate is 37. 7 per cent and investment rate is 39. 1 per cent. second, we have twin deficits – fiscal as well as current account deficit. we were on a path of fiscal consolidation before the crisis, but got off track because of the counter cyclical spending necessitated by the crisis. unlike major emes, which are running current account surpluses, we have recorded deficits on the current account. although current account deficits have been modest, the deficit reached a high of 2. 6 per cent of gdp in 2008 - 09 but is expected to moderate during 2009 - 10. third, given the right balance between domestic consumption and saving on the one hand, and infrastructural bottlenecks in major areas ( such as power, roads, urban infrastructure as also social infrastructure ) on the other, india is essentially a supply - constrained economy. just before the crisis, such supply concerns led to a view that there might be overheating in the economy. generally, weak external demand has