shaktikanta das : some thoughts on fiscal federalism speech by mr shaktikanta das, governor of the reserve bank of india, at the launch of the book " indian fiscal federalism ", mumbai, 19 march 2019. * * * i am honoured to be invited for the launch of the book “ indian fiscal federalism ” authored by dr. y. v. reddy and shri g. r. reddy. this is the latest in a prolific body of work that draws from dr. reddy ’ s hands - on experience with the indian economy and public policy. these insightful expositions are interwoven with glimpses of dr. reddy ’ s professional life and his ‘ insider ’ views. 2. as governor of the reserve bank of india during 2003 – 2008, after his stint as deputy governor during 1996 – 2002, dr. reddy ’ s journey was studded with many milestones. his tenure as governor can be best characterised by the words he used on assuming office in september 2003 to describe what his approach would be. he had said “ continuity and change will be mixed together appropriately. ” of course, it will be remiss of me if i do not to mention the response of dr. bimal jalan, the outgoing governor, who said “ dr. reddy will change whatever i did and will continue where he left off [ as deputy governor ]. ” 3. for a central bank, proactive action is of immense importance. when risks were brewing in the pre - 2008 period, dr. reddy sensed them pre - emptively. drawing from his speeches, the word ‘ overheating ’ entered the lexicon of monetary policy in india. during the build - up of financial excesses in advanced economies with possible knock - on effects on bystanders like india, he resolutely set about preparing india ’ s defences – building investment fluctuation reserves in the banking system ; recalibrating risk weights for vulnerable asset classes ; and setting prudential limits on inter - bank liabilities. in short, when the world was behaving in a pro - cyclical manner, dr. reddy had turned counter - cyclical ahead of the curve. as events later showed, these bulwarks became critical in protecting the indian economy from the ravages of the global financial crisis of 2008 – 09. 4. i have been an avid follower of dr. reddy ’ s work. having worked for several years on fiscal and economic

received by dicgc while the entire amount of payout was to co - operative banks, which account for only 14 per cent of the deposits insured by dicgc. 26. this cross - subsidization, or charging premium at a uniform rate from all categories of banks, obviously raises a moral hazard. one option for reducing cross - subsidy is to charge a risk - based premium, but we are not sanguine that this is necessarily optimal in india. there needs to be a clearer assessment of the tradeoff between minimizing the moral hazard and placing the additional burden of a higher premium on banks that are already weak and yet serve the very important objective of financial inclusion. another concern is that imposition of risk based premiums could have a market impact, with stock prices of already weak banks negatively affected by the burden of higher premiums. on the other hand, crosssubsidization can, in fact, be justified by viewing higher premiums on larger banks as a surcharge for their larger externalities on the rest of the system. i hope some of these crosssubsidization and moral hazard issues will figure in the deliberations of this conference. iv. adequacy of deposit insurance fund 27. the fourth challenge i want to raise relates to estimating the adequacy of the deposit insurance fund. public confidence in deposit insurance will be determined largely by whether the public believes that the deposit fund is large enough to meet its commitments. dicgc maintains an ex - ante fund that is funded by the premium collected from insured banks and income generated from investment of funds. for maintaining depositor confidence, the fund is required to be robust enough to meet claims arising out of routine failure of banks under normal situations. going by the past record of failures, the fund maintained by dicgc appears adequate. but it is not clear that the fund will be able to meet claims arising from the putative failure of a couple of small or medium size commercial bis central bankers ’ speeches banks. admittedly, no deposit insurer can maintain enough liquid funds to face a widespread financial crisis. in an extraordinary situation of systemic failure of banks, it is imperative that the deposit insurer is armed with unlimited and quick access to funds from the central bank and / or the government so that financial stability is not jeopardized. as we all know, it was arrangements such as this that played a crucial role in containing panic among depositors