not structural problems. they are all fixable by means of modest reforms. this is not to say that ambitious reform is not good, or is not warranted to sustain growth for the next decade. but india does not need to become a manufacturing giant overnight to fix its current problems. the immediate tasks are more mundane, but also more feasible one : clearing projects, reducing poorly targeted subsidies, and finding more ways to narrow the current - account deficit and ease its financing. over the last year, the government has been pursuing this agenda, which is already showing some early results. for example, the external deficit is narrowing sharply on the back of higher exports and lower imports. the government and the reserve bank said it would $ 70 billion this fiscal year, down from $ 88 billion last fiscal year, but recent data suggests it could be lower still. this leads me to another point. because analysts keep looking for major structural reforms to fix the deeper economic challenges, they ignore smaller steps or dismiss them as “ band aids ”. but strategically placed small steps – strategic incrementalism for want of a better term – taken together can deal with the immediate problems, thus buying time and economic and political space for the major structural reforms. put differently, when the indian authorities said they would bring the fiscal deficit below 5. 3 % last year, no one believed them. the final outturn was 4. 9 %. similarly, while we project the cad to come down to 3. 7 % this year, i think we could be pleasantly surprised. not all the actions we have taken are pretty, and not all are sustainable, but they have done the job. indeed, despite its shortcomings, india ’ s gdp will probably grow by 5 – 5. 5 % this year – not great, but certainly not bad for what is likely to be a low point in economic performance. the monsoon has been good and will spur consumption, especially in rural areas, which are already growing strongly, owing to improvements in road transport and communications connectivity. the banking sector has undoubtedly experienced an increase in bad loans, often owing to investment projects that are not unviable but only delayed. as these projects come onstream, they will generate the revenue needed to repay loans. india ’ s banks have the capital to absorb losses in the meantime. likewise, india ’ s finances are stronger than in the typical emerging - market country, let alone an emerging - market country in crisis. india ’ s overall public debt / gdp

. commercial banks in india are expected to start implementing basel ii with effect from march 31, 2007 though a marginal stretching is not ruled out in view of the state of preparedness. they will initially adopt standardised approach for credit risk and basic indicator approach for operational risk. after adequate skills are developed, both at the banks and also at supervisory levels, some banks may be allowed to migrate to the internal rating based ( irb ) approach. under basel ii, indian banks will require larger capital mainly due to capital required for operational risk. the rbi has introduced capital instruments both in tier i and tier ii available in other jurisdictions. in addition, the rbi is involved in capacity building for ensuring the regulator ’ s ability for identifying and permitting eligible banks to adopt irb / advanced measurement approaches. the sixth aspect is the role of capital in case of regional rural banks ( rrbs ) and cooperative banks, which provide banking services primarily in the rural and semi - urban areas. the problems with regard to this segment have been widely documented : these include constraints on timely credit availability, its high cost, neglect of small farmers and continued presence of informal lenders. it is argued that most part of the cooperative credit structure is multi - layered, undercapitalised, over - staffed and underskilled, often with high level of delinquent loans. the rrbs also appear to share these problems, although there are several viable institutions in this category. these are being addressed on a priority basis. a national - level committee had recently made recommendations to revive and restructure the rural cooperative credit structure. these have been accepted by the government which has set up a national level implementation and monitoring committee under the chairmanship of the governor for overall guidance in implementation. a process of revitalising rrbs and urban cooperative banks in a medium - term framework is also underway. seventh, we are adopting a three - track approach with regard to capital adequacy rules. on the first track, the commercial banks are required to maintain capital for both credit and market risks as per basel i framework ; cooperative banks on the second track are required to maintain capital for credit risk as per basel i framework and surrogates for market risk ; rrbs on the third track which though subject to prudential norms do not have capital requirement on par with the basel i framework. in other words, a major segment of systemic importance is under a full basel i framework, a portion of the minor segment partly on basel i framework and