duvvuri subbarao : funding of deposit insurance systems inaugural address by dr duvvuri subbarao, governor of the reserve bank of india, at the international conference “ funding of deposit insurance systems ” hosted by the deposit insurance and credit guarantee corporation ( dicgc ), mumbai, 18 january 2010. * * * at the outset, on behalf of the reserve bank of india, i welcome you all to india and to this wonderful state of goa. my thanks also to the asia regional committee ( arc ) of the international association of deposit insurers ( iadi ) for giving an opportunity to the deposit insurance and credit guarantee corporation ( dicgc ) to host this conference. this event is particularly important for us because it is being hosted as a part of the platinum jubilee celebrations of the reserve bank of india ( rbi ). evolution of deposit insurance 2. deposit insurance has historically been a reassuringly stabilizing force in a financial system notoriously susceptible to instability. in fact panics were a regular feature of american economic life even as banking was taking roots – most spectacularly during the great depression. it was the introduction of deposit insurance in 1933 that substantially reduced the vulnerability of american banks to runs. 3. over the years deposit insurance has taken root all around the world. collectively, we traversed a steep learning curve and learnt a number of lessons about the systems and processes of deposit insurance. the recent crisis has, however, thrown up a number of fresh questions about the financial sector, including about deposit insurance. finding answers to these questions and addressing the consequent challenges is going to be the priority task for all of us in the financial sector. i want to talk about some of the issues, but first let me say a few words about deposit insurance in india. historical perspective on deposit insurance in india 4. dicgc, a wholly owned subsidiary of rbi, is the second oldest deposit insurance system in the world. it was established in january 1962 initially only as a deposit insurance institution. however, in 1978 the corporation was also entrusted with the responsibility of credit guarantee and was rechristened as the deposit insurance and credit guarantee corporation ( dicgc ). the objective of extending guarantee cover to credit was to encourage commercial banks to extend credit to small borrowers belonging to weaker sections of society. but over time, it was felt that the credit guarantee schemes operated by the corporation had outlived their utility and the schemes were discontinued. the corporation has now reverted

1 % of gdp in 2011. it is expected to fall to 3. 2 % in 2012. the french deficit, for instance, came in at 5. 2 % of gdp in 2011, 0. 5 percentage points below the government ’ s target. i expect france to continue on this path and to achieve the 3 % deficit target in 2013. but while fiscal consolidation is a necessary pre - condition for sustainable growth, it is not sufficient. so the debate is not about austerity versus growth, instead it is about austerity and growth. we need both. no one is against growth, but growth cannot be achieved by spending programmes which fuel the economy for a quarter or two but are no more than a flash in the pan. the important bis central bankers ’ speeches thing is to find ways to increase the growth potential, and this is far more challenging than introducing popular but short - sighted initiatives. from my perspective, a growth package should have three components : i ) reforms in product and services markets ii ) reforms in labour markets ii ) funding of growth initiatives. as regards reforms in services markets, for example, policy instruments that could help to boost growth already exist at the eu level. the services directive was adopted in 2006. however, it has not yet been fully implemented in all member states. nine out of ten new jobs in the eu are created in the services sector. yet cross - border provision of services in the eu remains difficult. while 70 % of the eu ’ s gdp is generated in services, only 20 % of services are provided cross - border. up to 1. 8 % in additional growth could be unleashed for the eu with the full implementation of the services directive. the june european council will adopt measures to make sure that the growth - enhancing potential of the services directive is fully exploited. in labour markets, we see that member states have started to implement important structural reforms. spain is increasing the flexibility of employment contracts and addressing the problem of the country ’ s “ dual labour market ”. here in poland, the increase in the retirement age to 67 is a good example. it illustrates the fact that implementing structural reforms can be painful. but this pain should pay off in the future, as we have seen in germany with the “ agenda 2010 ” labour market reforms implemented from 2003 to 2005. germany is now profiting significantly from these reforms now. a key factor in labour market reforms is mobility – particularly in the euro area, but also at the level of the eu 27