that they are well along in their own preparations worldwide and many of them are pushing their numerous local suppliers to be prepared to maintain the flow of materials and services. that is a significant positive step. the recent conversion to the euro was very smooth, thus proving that a job similar to the one we have at hand can be successfully accomplished. but that intense focus in europe, along with other world financial troubles, has obviously been deflecting all too much attention away from y2k issues. i worry that time will simply run out for some activities in some countries, particularly in the developing economies, and as a result risks exist for some level of disruption in various locales around the world. all of this has been affecting our economy in a variety of ways. on the positive side an important element in some y2k programs is the accelerated replacement of aging computer systems with modern, state - of - the - art hardware and software. such capital expenditures should raise the level of productivity in those enterprises, and addressing y2k has increased the awareness of many senior executives of the complexity and importance of carefully managing their corporate information technology resources. the increased replacement demand also has contributed to the spectacular recent growth in this country ’ s computer hardware and software industries. a reverse effect, which i believe will shortly become visible, is that many institutions will ‘ freeze ’ their remediated and tested systems for the remainder of this year, effectively foregoing the installation of major new hardware and software systems. this moves some spending on technology forward from 1999 into 2000. so, ultimately, we are largely shifting the timing of these investment expenditures, rather than changing their total amounts very much. another area in which uncertainty about y2k readiness is likely to have noticeable effects in 1999 is in the management of inventories. as the millennium approaches, i expect businesses will want to hold larger inventories of goods as insurance against y2k - related supply disruptions. such a shift from ‘ just - in - time ’ inventory management to a ‘ just - in - case ’ posture is likely to prompt an increase in orders and production during late 1999, with these stocks subsequently being run off in the first half of 2000. we at the fed, for example, will do precisely that in our management of the production of new currency. while year 2000 preparation efforts may give a temporary boost to economic activity in some sectors, the probable net effect on the aggregate economy is slightly negative. other than the obviously very valuable ability to maintain operations

promoting expenditure. 56. the second task is to bring inflation down first to 5 per cent, and then even lower, consistent with india ’ s broader integration into the global economy. a high inflation scenario makes both savers and investors uncertain. the current inflation we are experiencing is a consequence of both supply shocks and demand pressures. the reserve bank ’ s monetary tightening has been aimed at restraining demand and anchoring inflation expectations. this has to be supplemented by supply side responses to raise the potential output of the economy. tenth challenge : good governance 57. i have so far highlighted nine challenges to accelerating our growth. identifying these challenges and drawing up plans to address them is the relatively easy part. what is infinitely more difficult is the translation of those policies into action. that brings me to the final item on my list – the challenge of providing good governance. 58. that good governance is at the very heart of economic growth and poverty reduction, and even political legitimacy, is one of the undisputed lessons of development experience from around the world over the last 60 years. 59. in the ultimate analysis, it is the quality of governance that separates success and failure in economic development. across countries, application of the same policies in roughly similar contexts has produced dramatically different results. in our own country, we have seen vast differences across states in development outcomes from out of the same mix of development policies. these differences across countries as well as across regions within countries, even as they adopt similar policy packages, arise because of differences in governance. indeed research shows that per capita incomes and the quality of governance are strongly correlated indicating a virtuous circle in which good governance results in economic development. rejig the elephant dance 60. let me now conclude. i have highlighted ten challenges that we need to address in order to accelerate output growth with focus on the quality of growth. i must admit that this list is by no means exhaustive, and individual lists can vary both in content and emphasis. i hope my list would, at the least, serve as a reference point for thinking through. 61. as people we are understandably eager for our economy to sprint like a tiger rather than amble like an elephant. yet few animals have an elephant ’ s stamina. and elephants do not always amble ; they dance too. and when elephants start dancing, they can go on for a long long time. but while dancing, an elephant can go off course occasionally. that calls for rejigging the dance. as