duvvuri subbarao : emerging market economies leading global growth remarks by dr duvvuri subbarao, governor of the reserve bank of india, at a panel discussion on the “ role of emerging economies going forward and key policy challenges ”, washington dc, 9 october 2010. * * * the three issues laid out in today ’ s agenda are particularly relevant at this juncture and how we answer them in the months ahead will determine how the world regains and then sustains economic growth and financial stability. let me begin with the first issue : how can emerging market economies ( emes ) best contribute towards securing global economic prosperity? the most important way in which emes can contribute to global economic prosperity is by doing more of what they have been doing – that is by maintaining their growth momentum. the last few months have witnessed a remarkable phenomenon. emes have, to use a word that has now become cliched, decoupled from advanced economies in a powerful way and started charting their own exit paths out of the crisis driven accommodative policies. even a few months ago, not many would have thought that this meant much or mattered much to the global economy. but now we know emes have made a “ difference ”. by recovering from the crisis sooner, emes have provided much needed stimulus to the global economy. to take a historical perspective, according to angus maddison ’ s long term gdp time series, china and india accounted for about half of the world gdp before the industrial revolution. since then their contribution declined to less than 10 per cent. rapid economic growth should help china and india to raise their per capita gdps, gradually bridging the gap with advanced economies, as japan, korea and singapore already have. that way they will provide diversified growth poles to the global economy and contribute to global economic prosperity. that emes can provide support to the global economy has been clearly demonstrated by our experience of the crisis. the great recession, for example, has been less deep than it would have been because of the growth contribution of emes, particularly china and india. and at the current juncture, when advanced economies are still experiencing a demand recession, it is the import demand from emes which is helping them make the necessary adjustment. in order to maintain their growth momentum, emes will need to address huge challenges and put in place both collective and individual country strategies. what these should be is by now quite well known. what the

of the monetary actions listed in the table. first, even while the indian economy has recovered quite rapidly from the slowdown, there is persistent global uncertainty. emes have generally done quite well in coming out of the crisis, but a major part of the global economy – the us, the uk, the euro zone – is not only showing only very modest signs of recovery, it is also manifesting new stresses, partly as a result of the huge build - up of sovereign debt, which governments used to support their various fiscal stimulus packages. over the past few weeks, optimism about a sustained, even is slow, global recovery, has been giving ground to concerns about another imminent slowdown. one thing that we learnt from the events of 2008 – 09 was that india is not immune to global turbulence. be it through trade, capital flows or a general sense of confidence about economic prospects, a global problem quickly becomes a domestic one. given these linkages, the risks from the global economy need to be taken into consideration while formulating domestic policy. second, the reality is that the policy instruments are far from being in a normal position. as the economy recovers, it is imperative that policy instruments be brought as quickly as possible back to a position consistent with the state of the economy. this is essential for the management of expectations as well as to re - create the capacity to respond, should another shock hit the economy. but, as important as it is to return to normal quickly, it is equally necessary to do so non - disruptively. the kind of rapid and massive reductions that were made to instruments during the crisis simply cannot be replicated in the reverse direction. growth is picking up and confidence gradually returning to businesses and consumers, but given the vividness of the crisis, the process is still likely to be vulnerable to both external shocks and domestic ones. rapid transitions in the policy regime might constitute one such shock. in essence, on this consideration, while rapid and drastic actions are entirely warranted when dealing with a crisis, managing a return to normalcy requires a more gradualist and calibrated approach. third, notwithstanding the above two issues, the fact is that inflation has taken hold, with both supply and demand pressures contributing to it. monetary policy must respond. the table indicates that it indeed has. action on rates and liquidity, through the crr, began in january and has continued at the measured pace indicated earlier over the past six months. one strong criticism of the reserve bank