##ane rocket science and financial alchemy in the financial sector, almost entirely for its own sake to almost complete exclusion of the needs of the real sector, created a massive “ financial sector – real sector imbalance ” which, being, intrinsically unsustainable, culminated eventually into the now - all - too - familiar apocalyptic denouement. 3. significantly, the above pre - 2007 story of massive and unprecedented current account imbalances was almost replicated in the current on - going eurozone crisis with large and persistent current account imbalances between the core, proxied by germany, and the netherlands, and the crisis - hit periphery, with the surpluses of the core being almost mirror image of the current account deficits of the periphery. indeed, it is noteworthy that current account surpluses of the core increased dramatically after the launch of the single currency because of significant depreciation of the real exchange rate in the core and appreciation of the real exchange rate in the periphery. such large, and persistent, current account imbalances between the core and the periphery would not have been possible but for the explicit moral hazard of fixed and stable exchange rates created by the single currency because the respective national currencies of the periphery would have depreciated in real terms resulting in timely automatic rebalancing of the current account imbalances! incidentally, but significantly, these current account imbalances between the “ core ” and the “ periphery ” are, to an extent, the result of post - 1999 fiscal convergence to fiscal divergence story in the eurozone for, unless, net private savings offset it, fiscal deficit typically tends to spill over into current account deficit and, therefore, post - euro launch, there ought to have been a credible, effective and functioning institutional enforcement mechanism to ensure ongoing compliance on maastricht fiscal parameters. of course, this post - 1999 fiscal convergence to fiscal divergence story in the “ periphery ” would not have mattered if, like in the case of japan, net private savings more than offset the comparable net public dissaving ( fiscal deficit ) of – 9. 5 %! so the way out of the current crisis is unwinding these imbalances through higher productivity and competitiveness in the periphery relative to the core. this is exactly what happened post - crisis in the case of unwinding of the imbalances between china, on the one hand, and the united states, on the other, with the

reduction in subsidies, by eliminating those which are inappropriate and not directly targeted to the poor, and the other is withdrawal of most of the tax exemptions, which are distortionary. the delivery of essential public services such as education and health to a large section of our population is a major challenge. fourth, the unemployment rate based on periodical surveys increased both in the rural and urban areas over the last fifteen years, with sharper increase in the rural areas, reflecting a slowdown in agriculture. a positive feature has been a significant reduction in the poverty ratio, but the number of poor is still unconscionably high. naturally, the overarching priority for public policy is creating employment and reducing poverty. some of the recently launched employment guarantee schemes seek to address some of these issues and rbi plays a supporting role through a programme of financial inclusion in the banking sector. finally, there is a growing recognition in india that governance reforms are critical to strengthen state capacity and enable it to perform its core functions. the task of improving the institutions of economic governance comprise, among others, many organizations and actions essential for efficient functioning of markets. it is recognized that good governance can co - exist only when the public sector functions fairly and efficiently, which is achievable by improving it and not by undermining it. the business community has, therefore, a vital stake in improving and empowering public institutions. there are grounds for optimism in regard to growth momentum and stability over the medium - term, even after accounting for the above - mentioned challenges. the persistent increase in gross domestic savings and total factor productivity indicate increasing level of potential output. there are discernible elements of self - sustaining and accelerating competitive strengths, as evident from increasing global presence of indian corporates and interest of global companies in india. the savings and investments balance as well as the external sector reflect the strength and the resilience in the indian economy. the micro structural reforms undertaken in the real economy are bearing fruits in some states resulting in double digit annual growth in their domestic product. other states are trying to follow the example of these growth pioneers. there are certain “ not easily quantifiable strengths ” which the indian economy possesses. a vast pool of science and technology graduates and the millions of people who are familiar with the english language are sources of strength. the familiarity with multiple languages in india prepares the people to adapt better to multi - cultural situations, making it easier for them to fit into international systems smoothly. the political climate