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RBI Perspectives on India™s Macroeconomic Challenges

(Fifth I.G. Patel Memorial Lecture delivered by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the London School of Economics on March 13, 2013)

First of all many thanks to the London School of Economics for inviting me to deliver the fifth I.G. Patel Memorial Lecture. It is an honour to which I attach immense value.

Dr. I.G. Patel

2. Dr. I.G. Patel represents a special bond between our two institutions – the Reserve Bank which I represent and the LSE where this lecture is instituted. Dr. Patel led both these institutions with great dignity and distinction, and is loved and respected by both our institutions.

3. Because the occasion demands it, I must repeat what I said at the Reserve Bank™s Platinum Jubilee celebrations in 2010.

4. Those of you who have an interest in the history of science would know that Sir Isaac Newton was known, among other things, also for his intellectual arrogance. When his friend and rival, Robert Hooke wrote to him, lauding his theory of gravity, Newton, for all his arrogance, wrote back with uncharacteristic humility:

If I have been able to see a little farther than others, it is because I am standing on the shoulders of giants.

5. That is a statement I can relate to. As the Governor of the Reserve Bank in these exciting times, I owe an intellectual debt of gratitude to the extraordinary men who led the Reserve Bank through several challenges, and made a mark in the economic history of India. Among the most distinguished of them is Dr. I.G. Patel. I am privileged to be in the same lineage as him.

6. During his long and illustrious career in India, Dr. Patel made very significant and lasting contribution to economic governance of India. He was Governor of the Reserve Bank at a critical time when the Indian economy had to battle a balance of payments crisis triggered by the second oil price shock in the late 1970s. He played an active role in securing accommodation for India from the IMF™s Extended Fund facility, an arrangement that was the largest in the Fund™s history at that time.

7. Indeed, Dr. Patel was the intellectual force behind resolving some of our biggest macroeconomic challenges of his time. As the Governor of the Reserve Bank today, I am involved in addressing some of India™s current macroeconomic challenges. The leadership that my predecessors provided in confronting these challenges always remains a source of motivation and inspiration for me in navigating through these challenges. I thought the best way I can honour the memory of late Dr. I.G. Patel is to talk about India™s current macroeconomic challenges from the Reserve Bank™s perspective.

India – Current Macroeconomic Context

8. India clocked an average growth of 9.5 per cent in the three year period before the global financial crisis (2005-08). For a nation that once believed that the ˜Hindu Rate of Growth™ was its destiny, this remarkable growth performance was cause for celebration. It was also a trigger for setting off an aspiration for double digit growth.

9. Today, there is a sharp reversal. Growth has decelerated, inflation is still high and stubborn, the investment rate has declined sharply and the external sector is beset with a record high current account deficit. This downturn has caused widespread anxiety that we may have got derailed from the high growth trajectory. It has also raised a number of questions. Is our growth story faltering? Has India™s potential growth rate declined? Are the growth drivers that worked our way during 2003-08 still intact? Has the world lost confidence in India™s growth promise? When will we reach double digit growth, and what indeed should we be doing to get there?

10. My short answer to all these questions is that the India growth story is still credible and that the long term growth drivers are still intact. If we do the right things, we can get back on a high growth trajectory. Equally, there is nothing inevitable about the India growth story. We can accelerate growth and improve welfare only if we effectively implement wide ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities.

11. The Government has to be at the center of this and lead the process of economic revival. As the central bank and as the regulator of large segments of the financial sector, the Reserve Bank too has an important role to play in this. What I propose to do today is to discuss some important macroeconomic challenges from the Reserve Bank™s perspective.

12. In particular, I will discuss three challenges:

  • Managing growth-inflation dynamics
  • Mitigating the vulnerability of external sector
  • Managing the political economy of fiscal consolidation

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Download the entire Speech Document from the link below

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(Fifth I.G. Patel Memorial Lecture delivered by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India at the London School of Economics on March 13, 2013)

First of all many thanks to the London School of Economics for inviting me to deliver the fifth I.G. Patel Memorial Lecture. It is an honour to which I attach immense value.

Dr. I.G. Patel

2. Dr. I.G. Patel represents a special bond between our two institutions – the Reserve Bank which I represent and the LSE where this lecture is instituted. Dr. Patel led both these institutions with great dignity and distinction, and is loved and respected by both our institutions.

3. Because the occasion demands it, I must repeat what I said at the Reserve Bank™s Platinum Jubilee celebrations in 2010.

4. Those of you who have an interest in the history of science would know that Sir Isaac Newton was known, among other things, also for his intellectual arrogance. When his friend and rival, Robert Hooke wrote to him, lauding his theory of gravity, Newton, for all his arrogance, wrote back with uncharacteristic humility:

If I have been able to see a little farther than others, it is because I am standing on the shoulders of giants.

5. That is a statement I can relate to. As the Governor of the Reserve Bank in these exciting times, I owe an intellectual debt of gratitude to the extraordinary men who led the Reserve Bank through several challenges, and made a mark in the economic history of India. Among the most distinguished of them is Dr. I.G. Patel. I am privileged to be in the same lineage as him.

6. During his long and illustrious career in India, Dr. Patel made very significant and lasting contribution to economic governance of India. He was Governor of the Reserve Bank at a critical time when the Indian economy had to battle a balance of payments crisis triggered by the second oil price shock in the late 1970s. He played an active role in securing accommodation for India from the IMF™s Extended Fund facility, an arrangement that was the largest in the Fund™s history at that time.

7. Indeed, Dr. Patel was the intellectual force behind resolving some of our biggest macroeconomic challenges of his time. As the Governor of the Reserve Bank today, I am involved in addressing some of India™s current macroeconomic challenges. The leadership that my predecessors provided in confronting these challenges always remains a source of motivation and inspiration for me in navigating through these challenges. I thought the best way I can honour the memory of late Dr. I.G. Patel is to talk about India™s current macroeconomic challenges from the Reserve Bank™s perspective.

India – Current Macroeconomic Context

8. India clocked an average growth of 9.5 per cent in the three year period before the global financial crisis (2005-08). For a nation that once believed that the ˜Hindu Rate of Growth™ was its destiny, this remarkable growth performance was cause for celebration. It was also a trigger for setting off an aspiration for double digit growth.

9. Today, there is a sharp reversal. Growth has decelerated, inflation is still high and stubborn, the investment rate has declined sharply and the external sector is beset with a record high current account deficit. This downturn has caused widespread anxiety that we may have got derailed from the high growth trajectory. It has also raised a number of questions. Is our growth story faltering? Has India™s potential growth rate declined? Are the growth drivers that worked our way during 2003-08 still intact? Has the world lost confidence in India™s growth promise? When will we reach double digit growth, and what indeed should we be doing to get there?

10. My short answer to all these questions is that the India growth story is still credible and that the long term growth drivers are still intact. If we do the right things, we can get back on a high growth trajectory. Equally, there is nothing inevitable about the India growth story. We can accelerate growth and improve welfare only if we effectively implement wide ranging economic and governance reforms. Slipping up on this will amount to a costly and potentially irreversible squandering away of opportunities.

11. The Government has to be at the center of this and lead the process of economic revival. As the central bank and as the regulator of large segments of the financial sector, the Reserve Bank too has an important role to play in this. What I propose to do today is to discuss some important macroeconomic challenges from the Reserve Bank™s perspective.

12. In particular, I will discuss three challenges:

  1. Managing growth-inflation dynamics
  2. Mitigating the vulnerability of external sector
  3. Managing the political economy of fiscal consolidation

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