originated in advanced economies, emerging economies too were affected, indeed by much more than they had thought possible. the contagion brought home a simple message. in a rapidly globalizing world, national and international financial stability are interlinked. they are really two sides of the same coin. another important lesson we learnt is that financial markets are not self correcting. indeed in the pre - crisis years, a consensus was building around the view that modern risk management has increased the resilience of the financial sector, and that any excess would self correct in good time. the crisis proved that to be wrong. as we unlearnt that, we also learnt some new insights – that it is difficult to detect signs of pressure building up in the system in real time, that the financial sector can contain pressure for a longer time than we think possible, and as a consequence, when the inevitable implosion takes place, it can be quite disastrous, or even catastrophic. we learnt that it is difficult to predict the precise nature of the implosion. for example, in the pre - crisis years, even the few who sensed stress bis central bankers ’ speeches building up in the system, thought there would be a currency crisis ; in the event the implosion took the form of a financial sector crisis. there were other lessons too. that a collection of rational financial institutions does not necessarily make a rational financial sector. in other words, rational behaviour at the individual institutional level does not aggregate to collective rationality because of the fallacy of composition. financial institutions are notoriously prone to herd behaviour. they have a strong collective tendency to over expose themselves to the same type of risk during an upturn, and become overly risk averse during a downturn which can lead the whole system on a downward spiral of risk aversion, market seizure and instability. converting lessons into policies i have so far spoken about the broader lessons of the crisis that have enhanced our understanding of the financial sector, especially of the financial sector in a highly integrated world. a logical question would be how are we converting those lessons into practical policies and systemic improvements. this is what i now want to turn to. as you all know, the last four years have witnessed a vigorous debate internationally on how to foster a strong, stable and sustainable financial sector. there has already been significant agreement on some reforms while some important issues are still under debate. emerging economies and global reforms there have been some questions about why emerging economies too should

to 5. 4 per cent in the current decade ( table 1 ). transformation of the economy is quite apparent from the noticeable changes that have occurred in the sectoral composition of output. the share of services in the national income has steadily increased with corresponding fall in the contributions of agriculture and industry over the years. services sector now accounts for nearly two third of total output as against less than half in the early eighties and the nineties. share of industry declined marginally to 19 per cent from 20 per cent whereas share of agriculture registered steep decline from 38 per cent to just 17 per cent ( annex 1 ). this positive performance seems to be an outcome of reforms encompassing a range of measures that led to transformation spreading over all the sectors of economy. transformation brought in higher degree of sophistication and efficiency in operations of almost all the sub segments of real as well as financial sectors. moreover, domestic economy has become far more integrated with rest of the world which is visible not only in terms of growing trade volumes ; financial flows from and to the outside world have also been steadily growing. there are some experts who argue that india ’ s economic transformation needs to be attributed to change in policy orientation of 1980s rather than the reforms undertaken during 1990s. although they do recognise the possibility that improvement in 1980s might have run out of steam without further reforms undertaken in the nineties ( subramanian, 2007 ). while, academic debate as to what triggered the economic transformation might still be unresolved, there is a near consensus with regard to the important role of liberalisation process initiated in the early nineties in placing the economy on a higher growth path. the economic reforms that ushered in 1991 put forward some important political questions. the first question comes to our mind is about the timing of the reforms i. e. why the reforms were started only in 1991 and why not earlier? how the process of reforms continued despite changes in ruling party at the centre? how the direction of reforms sustained and remained irreversible despite various hurdles and hiccups? the answers to these questions, to a large extent, lie in the transformation in political spectrum of the indian electoral democracy. as one avid follower of india ’ s economy puts it, “ - - - the greatest change in the last 10 years has been in the attitude towards reforms. whereas the vocal supporters of reforms within india were rare during the 1980s, virtually every political party today recognises the need for continued reforms ” ( panagariya, 2008 )