Take up one idea. Make that one idea your life--think of it, dream of it,live on that idea: April 2011

Monday, April 18, 2011

जब आप क्रोध में होते हैं, तब आब्जर्वेशन कम से कम रह जाता है। जब आप क्रोध में होते हैं, तब निरीक्षण की क्षमता बिलकुल खो जाती है। और जब क्रोध में होते हैं, तब सर्वाधिक निरीक्षण की जरूरत है। लेकिन बड़े मजे की बात है, अगर निरीक्षण हो, तो क्रोध नहीं होता; और अगर क्रोध हो, तो निरीक्षण नहीं होता। ये दोनों एक साथ नहीं हो सकते हैं। अगर एक व्यक्ति क्रोध में निरीक्षण को उत्सुक हो जाए तो क्रोध खो जाएगा।

जीवन प्रतिपल चुनौती है। और जो उसे स्वीकार नहीं करता, वह जीते जी ही मर जाता है। बहुत लोग जीते जी ही मर जाते हैं। बर्नार्ड शा कहा करता था कि लोग मरते तो हैं बहुत पहले, दफनाए बहुत बाद में जाते हैं। मरने और दफनाने में कोई चालीस साल का अक्सर फर्क हो जाता है। जिस क्षण से व्यक्ति जीवन की चुनौती का स्वीकार बंद करता है, उसी क्षण से मर जाता है। जीवन है प्रतिपल चुनौती की स्वीकृति।

लेकिन चुनौती की स्वीकृति भी दो तरह की हो सकती है। चुनौती की स्वीकृति भी क्रोधजन्य हो सकती है; और तब प्रतिक्रिया हो जाती है, रिएक्शन हो जाती है। और चुनौती की स्वीकृति भी प्रसन्नता, उत्फुल्लता से मुदितापूर्ण हो सकती है; और तब प्रतिसंवेदन हो जाती है।

अक्सर ही जीवन जैसा प्रारंभ होता है, वैसा अंत नहीं होता। अक्सर अंत सदा ही अनिर्णीत है, अंत सदा ही अदृश्य है। अक्सर ही जो हम सोचकर चलते हैं, वह नहीं होता। अक्सर ही जो हम मानकर चलते हैं, वह नहीं होता। जीवन एक अज्ञात यात्रा है। इसलिए जीवन के प्रारंभिक क्षणों में--किसी भी घटना के प्रारंभिक क्षणों में--जो सोचा जाता है, वह अंतिम निष्पत्ति नहीं बनती। और हम भाग्य के निर्माण की चेष्टा में रत हो सकते हैं, लेकिन भाग्य के निर्णायक नहीं हो पाते हैं; निष्पत्ति कुछ और होती है।

The four years from 2004-05 were a remarkably good period for the finances of State Governments.

The average combined fiscal deficit of States fell to 2.2 per cent of GDP, from their preceding four years' level of 4.2 per cent.

An average revenue deficit of 2.5 per cent during 2000-01 to 2003-04 turned into a surplus of 0.1 per cent for the subsequent four years.

The outstanding debt-GDP ratio, which had steadily risen from 22.5 per cent in 1990-91 to 32.8 per cent in 2003-04, also declined to 26.6 per cent by 2007-08.

All this was, of course, facilitated by high economic growth, which proved to be the proverbial tide that lifted all boats.

The last couple of years have, however, seen a setback to the fiscal turnaround process, with the general growth slowdown impacting the States' own revenues and share in Central taxes.

This, alongside the implementation of new Pay Commission scales for employees, has led to the re-emergence of revenue deficits and the overall fiscal deficit climbing beyond 3 per cent.

The Reserve Bank of India's recent State Finances: A Study of Budgets shows that the number of States with revenue deficits increased from just four in 2007-08 to six in 2008-09 and 11 in 2009-10.

Even for 2010-11, nine States are budgeted to have revenue deficits; the figure may well go up in the revised estimates

The picture is worse in States such as West Bengal, where interest payments, salaries and pension payments consume over two-thirds of revenue receipts, as against roughly a third in Tamil Nadu and Maharashtra or less than a fifth in Chhattisgarh.

Whichever alliance comes to power in West Bengal — the last State to have enacted a fiscal responsibility law in July 2010 — will have its task cut out.

Reverting to the path of fiscal consolidation is important not only to create headroom for more purposive, growth-promoting investments, but also to complement the reforms already underway at the State-level.

Take the Gujarat Government's move to have separate agricultural power feeders that provide guaranteed eight-hour supply to run farm pump-sets and single-phase electricity for the rest of the day.

Or, Ms Mayawati's administration in Uttar Pradesh, which has chosen its own concessionaire to build a 165-km, six-lane expressway between Greater Noida and Agra, without involving the National Highways Authority of India.

One could also mention Chhattisgarh (which has a well-functioning paddy procurement and public distribution system that was non-existent till recently) and Madhya Pradesh (which has demonstrated the viability of depositing procurement monies directly into farmers' bank accounts).

Such initiatives are worthy of emulation even by the Centre, which should set its own standards for the States to undertake further reforms and maintain fiscal discipline.

ANSWER IF YOU CAN THINK LIKE AN IAS OFFICER?

1. Effects of globalization on India? growth versus equity debate

2. Apprehension among Indians about East India Company still today??

3. There are so many institutes cropping up in the country what is your opinion about the quality of education they are offering?

4. what qualities you look in a civil servant?

5. Most of the creams is in medical and engineering colleges, is it good for the country?

6. In a situation where people are demolishing a temple/mosque - what would you do as a DM/SP?

7. North East - police excesses - common man’s suffering-comment.

8. Human involvement in administration?

9. What do you like about India’s tradition, is good for us?

10. Why Naxals are against schooling system?

11. One thing which can transform India?

12. In a place where groundwater is polluted somewhere and water is drawn from a nearby river and stored in an overhead tank from where it is supplied to all the houses through pipes. Now terrorist attacks are taking place on these pipes- what would you do?

13. Suppose you are DC and due to maoists terror, people have stopped coming to offices and administration is in paralysis. What would you do?

14. Suppose you are SP and senior officers are engaging in corrupt acts. What would you do?

15. Suppose ground water is polluted in an area and no nearby river is available. What would you do?

16. Comparative analysis of waterways, railways, roadways as a means of transport?Which is more polluting road or rail?

17. Suppose we are designing an expressway from New Delhi to Chandigarh to reduce travel time. What are all the basic considerations?

18. Comment on caste

19. Why crime against women is more in north India than in south India?

20. Role of culture in health

21. You are posted in a rural area and you have to cross a river with boat.
There is a older or a servant with you who has served you for 15-20 years and your boss also in the boat, boat start to sinks in the middle and you only know swimming. Whom will you save? You can save just only one person. Your boss can give you rewards and medals...Whom will you save and why?

22. You are DM of Jodhpur, Prince Charles come and ask you to arrange facility to shoot a deer and Bishnoi community is there who will surely oppose this. what will you do?

23. Now you are DM of Sriganganagar , there was incidence of fake arm licenses being issued to people and few big officials are now under scanner , so what will you do??

24. Because of your honesty, you are being regularly transferred; your wife will not pack bags then what u will do? Education of your children also will suffer due to transfers

25. Should Anna Hazare (civil society) allowed in the process of law making?

26. Nowadays many using Satyagraha as a tool to hamper Government function.. What do you think about this?

27. If separate Elam created, what is India’s stand? (she replied India will not favor as it affects territorial integrity of Srilanka)

28. Then India interfered internal matter of Pakistan? (asked about India’s involvement in Bangladesh freedom)

29. is there any scheme in India provides food directly to hungry stomach? If no, what will you suggest?

few important topics for punjab national bank exam-descriptive paper

How to handle agitations?

• Telengana MP’s fast to drop charges against students
• Gujjar Stir
• Shiv sena protest against removal of Dadoji Konddeo’s statue: 50
buses destroyed
• Loss of public property
• Disturbance to normal life
Corruption and Scams • 2G Scam
• Commonwealth Games scam
• Adarsh Housing
• Allegation on CVC P. J. Thomas
• Allegation on B. S Yedurappa
• Illegal Mining in Karnataka
• S-Band spectrum issue
• Black Money
• Radia tapes controversy
• Demand for JPC
• Karnataka Lokayukta issue

Internal Security

• Kashmir Issue
• Naga issue
• Separatist movement in North Eastern states
• Naxalism
• New initiatives for internal security and Coastal Security

Centre State relations

• Karnataka: Role of governor, anti defection and centre state

relations

Inter state water dispute

• Krishna tribunal award
• Babli project
Babri verdict
• What to prevail: Faith or Reason
• Appreciation and Criticism
Civil liability for nuclear damage bill 2010
• The Act
• CSC

Voting Behavior

• Landslide win of Nithish Kumar

• Return of UPA in power

AFSPA

• Should it be repealed.
Caste census
• Why and why not?
• Merging caste enumeration and head count: pros and cons
Declining Parliamentary behavior
• Disruptions in parliament

Politics of Regionalism

• Telangana issue

• Srikrishna panel report

Freedom of expression

• Book ban and freedom of expression

• Freedom of expression and contempt of court

Women Reservation in India

ADMINISTRATIVE
Aadhar: Unique Identification Scheme
Census 2011
Electoral Reforms
Police reform
• Narco test & supreme court;
Criticism of planning commission

Judicial reform

• Judicial Standards and Accountability Bill
• Centres for Advanced Legal Studies and Research Bill, 2010
• The Prime Minister has recently called for a major overhaul of the
legal education system in the country to bring it in tune with the needs of the current socio-economic scenario.
• Impeachment proceedings against justice Dinakarna and Sukumar Sen
• Uncle Judge syndrome

Educational reform

• Higher education and Research bill
• Educational tribunals bill
• Foreign universities bill
• Privatisation of higher education ©VISION IAS
• FDI in Higher Education

Health Sector reform

• Medical ethics and clinical trial;

• Bachelor of Rural Health Care course

• Medical Courses in IIT

Industrial disasters

• Bhopal Gas Tragedy

• Chitra oil spill

Accidents

• How to reduce accident in IAF;

• Railway Safety

Civil Services Reform

• ARC

• Civil Services Survey

Social

Death penalty
• Philosophical Debate
• Mercy plea
Honor killing
• about 1000 killed every year
Gender equality
• Gender equality and armed forces
Death of RTI activists;
Provisions and programs for
persons with disabilities;
Surrogacy in India
• law and morality superstitions

Socio-Economic

Naxalism

• IAP-LWE(Integrated action plan for left wing extremism affected areas)

Food security

• Food security: Universal or Targeted
• New proposed bill
• Difference between NAC and PM/PC
• Demand for PDS Reform
PDS reform
• Behind the success story of universal PDS in TN
• Inflation & public investment in agriculture ,universal PDS, Future trading
• Maharashtra using GPS to track kerosene tankers of PDS
• PDS and biometric, GPS, SMS
• PDS reforms conferenceInflation
• New WPI
• New CPI
• ESMA
Paid news
• SEBI's direction to PCI(PCI's guidelines) regarding private treaties between media houses and listed or to be listed non media

companies ;

• Corruption in media

• Radia tapes controversy

Environment and Development

• Jaitpur power plant& peoples protest
• Plan to give tribal a share of mining profits
• potential future value of land must be considered for compensation
• Media hype and reality of new India
• Implementation of FRA
• Illegal mining
• Commission to probe illegal mining of coal, iron and manganese;
• New Mines and Minerals (Development and Regulation) Bill, 2010
• action plan to curb illegal mining;
• Climate change and Developing countries.
• POSCO issue
• National Green Tribunal
• GM crops
Decontrol of petrol prices
• Revenue neutral regime for petroleum tax; Population
• Population in the era of globalization: asset or liability

Economic

Need for Super Regulator

• Regulatory bodies : what , why, balance b/w autonomy and accountability

• ULIPs , IRDA and SEBI

• issue of overlapping jurisdiction of regulators

• FSDC

TAX REFORMS:GST&DTC

• benefits and hurdles

FDI in retail

• Discussion paper

Financial inclusion

• launch of ‘Swabhimaan', a special campaign for financial inclusion to bring banking to the masses
• New Banking licenses
• Bank denying Muslim scholarship accounts;
• One rupee bank account;
• Mobile Banking
• Financial inclusion and India post International Issues
Wikileaks :pros and cons
Currency war
Migration, Globalisation etc
MDG

Pro democracy protests in Mediterranean and Arab countries.

• Egypt, Libya, Yemen etc.

Environment issues

• Global warming/Cancun Summit
• Biodiversity/ Nagoya summit
Middle East peace process Bilateral
India's Global Leadership
• P5 heads visited India in 2010
• India's Cancun efforts appreciated
• Global reports predict bright Vibrant Economy
• India in the Security Council
2010 - Scripting a landmark year in Indian diplomacy
Recent Bilateral Updates.
• USA, Russia, France, China, UK, Myanmar, Sri Lanka, Malaysia etc.

The Global Economy and Financial Markets

2. A variety of risks, including political and social turmoil in parts of the world combined with natural disasters, have made the global recovery vulnerable. Financial conditions have turned volatile and uncertain, with risks of adverse feedback loops into the global economy. Recurring sovereign debt fears have affected market confidence. In the crisis-affected economies, financial systems are yet to be fully repaired. While the sense of crisis has waned, new challenges have surfaced.

3. The global recovery may be jeopardized by a sustained rise in oil prices. Apart from the inflationary pressures confronting particularly the emerging and developing countries, there is the danger of a slowdown in the global economy unless oil prices moderate from current levels. Furthermore, since the summer of 2010, several natural calamities and consequent food supply constraints have collided with the post-crisis resurgence of demand. World food prices have surged considerably due to concerns about low future supplies because of bad weather and low inventories, raising concerns about food security. Speculative movements in commodity derivative markets are also causing volatility in prices.

Global Challenges and the Role of the IMF

4. The overarching problems confronting the international monetary system stem from weaknesses in detecting and communicating early warnings of impending crises and management of global liquidity. This calls for fundamental reform of the international monetary system. It is also important to evolve a mechanism to address the challenges of stemming volatile capital flows and to strengthen multilateral adjustment mechanisms to deal with imbalances and sources of instability.

IMF Surveillance

5. The surveillance function is critical to the IMF’s overall mandate. By focusing on vulnerabilities and detecting the onset of crises, it assumes a vital, preemptive role in preserving global and national stability. Effective implementation at both multilateral and bilateral levels is the key to providing surveillance with incisiveness and traction. We believe that this can be achieved within the ambit of the existing provisions of the Articles of Agreement. If, however, there is a consensus that there are gaps in the legal mandate that hinder effective implementation, an amendment to the Articles is the optimal approach. Ensuring consistency and comprehensiveness across the various levels of surveillance is important, as is the candour and evenhandedness of the IMF - that systemic risks are pointed out irrespective of where they may originate. We need to stress that multilateral surveillance by the IMF should not lose sight of sovereign debt concerns of developed countries by adopting tighter screening criteria for developing countries that have actually seen fiscal improvement relative to the advanced economies.

Managing Capital Flows

6. As the recovery of emerging and developing countries has gained momentum, capital flows have surged back to near pre-crisis levels. These flows have exhibited considerable volatility, imparting macroeconomic instability in the event of sudden stops and reversals, eroding competitiveness and complicating the setting of macroeconomic policies. Policy prescriptions with respect to capital flows should be even-handed. So far as lumpy and volatile flows are a spillover from policy choices of advanced economies, managing capital flows should not be treated as an exclusive problem of emerging market economies and the burden of adjustment should be shared. How this burden will be shared raises both intellectual and practical challenges.

7. As regards multilateral strategies to managing capital flows, it is difficult to follow an approach that seeks to establish, standardize, prioritize or restrict the range of policy responses of the member countries that are facing large surges in volatile capital inflows. Based on their experience, policymakers must have flexibility and discretion to adopt policies that they consider appropriate to mitigate risks through macroeconomic, prudential and capital account management policies without a sense of stigma attached to particular instruments. Given the state of knowledge on these issues, it will be premature to consider amending the Articles to either give the IMF jurisdiction over capital account policies of member countries or to impose an obligation on members on this count.

The IMF’s Resources

8. We welcome the ratification of the April 2008 quota reforms. The next step in this process should be the speedy ratification and implementation of the 2010 quota and governance reforms. A comprehensive review of the quota formula should be completed by January 2013 to set the stage for the 15th General Review of Quotas by January 2014 which will carry forward the modest progress made so far in enhancing the representation of dynamic emerging and developing countries in the IMF to meaningfully reflect the changing global economic realities. We must make our best efforts to complete the 2010 reform before the 2012 Annual Meetings.

9. We welcome the expanded and amended New Arrangements to Borrow (NAB) which became effective from March 11, 2011. The activation of the NAB should be regarded as a bridge between current expectations and the availability of higher quota resources under the 14th General Review. Subsequently, NAB should be scaled down so as to preserve the quota-based character of the IMF as an institution that is accountable to its membership.

Reserve Adequacy

10. In our view, the insurance that reserves provide against sudden stops in growth due to capital drying up far outweigh the opportunity costs. Reserve accumulation by countries is an important part of the global safety net, particularly when the reserve accumulation takes place in the context of current account deficits.

11. Any assessment of reserve adequacy needs to be informed by underlying country-specific conditions, rigorous analytical and empirical foundations and judgments based on practical experience. There should be due consideration to macroeconomic and prudential frameworks and policies, as well as alternative forms of contingent financing, country insurance, and overall assets and liabilities that may not be easily captured in any formula for reserve adequacy. For emerging economies facing volatile surges of capital flows, consideration needs to go even beyond to a broad range of scenarios relating to potential drains on reserves, including a sudden stop of new financing, withdrawal of foreign portfolio investments, capital flight, and current account vulnerabilities. Further, the question of reserve adequacy cannot be resolved without addressing the broader issue of scarcity of safe reserve assets.

Currency Internationalization and the Role of the SDR

12. In principle, it is desirable to develop a multi-currency system with several currencies operating as broad substitutes and reflecting changing economic weights and global realities. In this context, we note that there have been recent efforts by the IMF to promote the use of SDR as a potential reserve asset for the evolving international monetary system. For the SDR to take on this significant role, several prerequisites have to be in place. The SDR has to be accepted as a liability of the IMF, has to be automatically acceptable as a medium of payment in cross-border transactions, be freely tradeable and its price has to be determined by forces of demand and supply. As the SDR does not satisfy these conditions, it cannot be a reserve currency in the international payment system. In principle, one needs a global central bank to issue SDRs which take the characteristic of unit of global payment and settlement system. Thus, we see the move to multicurrency world as a gradual evolution. Another dimension of this issue is to change the composition of the SDR basket. Going by the recent initiatives, if at all there is a move to alter the composition of the SDR basket, we could consider including currencies of those dynamically emerging market economies that satisfy the existing inclusion criteria: in particular, a fully convertible capital account and a market determined exchange rate.

Developments in the Constituency

13. I now turn to developments in my constituency.

Bangladesh

14. Bangladesh is steadily moving towards a higher growth trajectory that is largely inclusive, environment-friendly and well supported by continued high performance in the agriculture sector. External sector viability has benefited from export growth estimated at 30 percent and the strength of inward remittances. Concerted efforts to address the shortage of power have improved the investment climate. However, inflation remains high, with pressures from global prices of fuel, food and fertilizers interacting with enhanced internal demand. Revenue mobilization has risen by 28 percent till February 2011 strengthening fiscal sustainability. The budget deficit is expected to remain below 4.5 percent of GDP thereby aiding overall macroeconomic stability. As import demand picks up on the back of domestic demand, some strains could build on the balance of payments, although the level of foreign exchange reserves would remain sufficient at the level of over four months of imports. Accordingly, monetary policy is being tightened with the exchange rate being allowed to depreciate and cushion the balance of payments. Over the medium term, the progressive removal of constraints on investment, domestic and foreign, particularly in the context of private and public sector partnerships in large infrastructure projects would enable Bangladesh to embark upon double digit growth with stability.

Bhutan

15. Bhutan’s growth momentum has been strong, underpinned by the prudent and skillful macroeconomic management. Real GDP growth accelerated to nearly 8 per cent in 2009-10, helped by robust growth in hydropower, construction and services sectors. However, inflation reached 9 per cent at end-2010. The current account deficit has increased to about 13 per cent of GDP due to strong imports in the hydropower sector, but the overall balance of payments has remained in surplus due to sizeable grants and loans disbursements. The reserve position has improved and remains comfortable. Credit has grown rapidly, mainly driven by housing and construction sectors as well as personal loans. Bhutan’s financial sector coped with the global financial crisis well and financial stability indicators are comfortable.

India

16. The Indian economy, on the back of improved agricultural output, strong private consumption, robust investment, and a pick-up in exports, has rebounded strongly with a GDP growth of 8.6 per cent in 2010-11. However, inflation has emerged as a major concern. Headline inflation has remained firm despite some moderation in food inflation as generalised price pressures have emerged with rising inputs costs feeding into manufactured products inflation. The hardening of global commodity prices, particularly oil prices have further accelerated inflation. A sequenced withdrawal of monetary accommodation is helping to contain inflationary pressures and anchor inflationary expectations which remained at elevated levels for a large part of 2010-11, largely driven by fuel and food prices. The calibrated fiscal consolidation that resumed in 2010-11 is being carried forward into the medium-term, thus alleviating some pressures on aggregate demand. The budgetary initiatives in 2011-12 indicate further progress towards it, while giving due importance to the objectives of removing structural constraints, promoting infrastructure investment and strengthening the earlier policy initiatives towards inclusive growth. However, a potential increase in the subsidies on petroleum products and fertilizers as a result of high crude prices could put pressure on expenditure. Managing capital flows so as to dampen potential threats to macroeconomic and financial stability is a continuous challenge. Despite some tightness in money markets, financial conditions have been orderly with a pick-up in credit growth, vibrant equity market activity and a stable foreign exchange market. Medium-term prospects continue to be positive. Downside risks emanate mainly from continuing uncertainty about energy and commodity prices which may vitiate the investment climate, posing a threat to the current growth trajectory. Notwithstanding the risks, the Indian economy is poised to sustain the growth momentum.

Sri Lanka

17. Emerging out of three decades of civil conflict and the downturn brought on by the global crisis, the economy of Sri Lanka has resumed strong growth in an environment of macroeconomic and financial stability. Real GDP grew by 8.0 per cent in 2010, establishing a higher growth path underpinned by the peaceful domestic environment, improved investor confidence, strengthening macroeconomic fundamentals and the gradual recovery of the global economy. Ebbing inflation and a benign inflation outlook has enabled the continuation of an accommodative monetary policy stance with moderation of interest rates in all market segments supporting economic activity. The recent floods have caused some damage to agricultural production which has spiked headline inflation in the past few months higher than expected earlier. However, core inflation declined and currently remains low at single digit level. An encouraging improvement in the overall fiscal situation was witnessed in 2010 with the recovery in government revenue supported by the expansion of economic activity, the containment of recurrent expenditure, as well as the addressing of certain persistent structural issues in the tax system. The budget deficit was contained within the target of 8.0 per cent of GDP in 2010, down from 9.9 per cent in 2009, and the commitment to fiscal consolidation will ensure further reduction of the budget deficit to 6.8 per cent in 2011 and to below 5 per cent in the medium term. The external sector, which made a remarkable turnaround since the second quarter of 2009, has continued to improve. Both exports and imports recovered strongly, while increased earnings from the tourism industry and higher inward remittances offset the widening trade deficit, limiting the external current account deficit. Increased capital and financial flows resulted in the balance of payments (BOP) recording a surplus in 2010, strengthening external reserves of the country. Supported by the favourable macroeconomic environment and a sound regulatory and supervisory framework, the financial sector improved and system stability strengthened in 2010 as reflected in all prudential indicators. Banks’ credit flows significantly recovered, profitability improved, capital adequacy further increased above the threshold and the ratio of non-performing loans declined, while provisions for loan losses increased. Going forward, external shocks due to higher food and energy prices in the global market pose some risks to the balance of payments and inflation outlook.

Concluding Remarks

18. While the trough of the crisis definitely appears to be behind us and there are signs that the recovery is consolidating, new challenges facing the global economy render it vulnerable. We have to remain vigilant and be prepared to deal with all threats, old and new, as we repair and rebuild. The global problems we are facing today are complex and not amenable to easy solutions. Many of them require significant and often painful adjustments at the national level, and in a world divided by nation-states, there is no natural constituency for the global economy. At the same time, the global crisis has shown that the global economy as an entity is more important than ever. Given the deepening integration of countries into the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone. We should cooperate not only to firmly exit from the crisis, but also to ensure that in resolving this crisis, we do not sow the seeds of the next one. The IMF has to continue to weave together the fabric of international cooperation. This is in the common interest of all. We must ensure that the IMF is adequately prepared for this role so that it remains relevant, legitimate and effective.

AS PER THE HEAD OF AN APEX BANK OF INDIA

Mr. Chairman

1. Recent experience suggests that globalization offers incredible opportunities but also poses immense challenges. If the years before the global financial crisis - the period of the so called ‘Great Moderation’ - demonstrated the benefits of globalization, the devastating toll of the crisis showed its costs. Just as in the case of an economy, there are price setters and price takers, in the international economy too, there are economies which shape the forces of globalization and those that have to shape their policies to adjust to those forces of globalization. The post-crisis reform effort - whether here at the IMF or at the other global fora such as the BCBS, FSB, WTO - is all aimed at managing the forces of globalization for maximizing our collective welfare. For these reforms to be sustainable, it is important that they are even handed as between those who shape the forces of globalization and those who have to adjust to the forces of globalization.

EMEs in the Global Context

2. Before I get to specific issues, let me make a brief comment on EMEs in the global context. The shift in the global balance of power in favour of EMEs is by now a familiar story. It may be useful to put some numbers around that. Setting GDP at 100 in the base year of 2000, against the aggregate growth of 17 per cent in the decade 2000-10 of advanced economies, emerging market and developing countries (EMDCs) grew by 82 per cent and BRICs (Brazil, Russia, India, China) by a whopping 127 per cent. When we look at shares in global GDP, the share of advanced economies in the global GDP dropped from 80 per cent in the year 2000 to 67 per cent in 2010, with a mirror increase in the share of EMDCs.

3. 2010 was a year of recovery, and EMEs powered this by contributing to nearly three quarters of global growth in 2010. EMEs were also the motive force behind the estimated expansion of world trade by 12 per cent last year, an impressive reversal from shrinkage of 11 per cent in 2009.

4. These trends have an interesting implication for the decoupling hypothesis, which was intellectually fashionable before the crisis. As a matter of fact, the crisis failed to validate the decoupling hypothesis, as all EMEs were affected, admittedly to different extents. What the crisis, in fact, reinforced is that the economic prospects of advanced economies and EMEs are interlinked through trade, finance and confidence channels.

5. Let me now move on to specific issues. In the context of the theme of the session, I want to address five topics which are all interconnected.

Global Rebalancing

6. First is the issue of global rebalancing. Global rebalancing will require deficit economies to save more and consume less, while depending more on external demand relative to domestic demand for sustaining growth. Surplus economies will need to mirror these efforts - save less and spend more, and shift from external to domestic demand. The problem we have is that while the adjustment by deficit and surplus economies has to be symmetric, the incentives they face are asymmetric. Managing rebalancing will require a shared understanding on conducting macroeconomic policies to minimize disruptions to macroeconomic stability. These adjustments have several components. Importantly, letting exchange rates remain aligned with economic fundamentals, and an agreement that currency interventions should not be resorted to as an instrument of trade policy should be central to a coordinated approach at a multilateral level.

Capital Flows

7. That takes me to the second facet of global imbalances - return of lumpy and volatile capital flows. Since capital flows have become such an emotive topic around the world in recent months, it is important to be mindful of a few realities. First, EMEs do need capital flows to augment their investible resources, but such flows should meet two criteria: they should be stable; and they should also be roughly equal to the economy’s absorptive capacity. The second reality that we must remember is that capital flows are triggered by both pull and push factors. The pull factors are the promising growth prospects of EMEs, their declining trend rates of inflation, capital account liberalization, and improved governance. Among the push factors are the easy monetary policies of advanced economies which create the capital that flows into the EMEs.

8. To the extent that lumpy and volatile flows are a spillover from policy choices of advanced economies, managing capital flows should not be treated as an exclusive problem of emerging market economies. How this burden is to be shared raises both intellectual and practical challenges. The intellectual challenge is to build a better understanding of the forces driving capital flows, what type of policy instruments, including capital controls, work and in what situations. The practical challenge is the need to reach a shared understanding on an organizing framework for cross border spillovers of domestic policies in capital-originating countries, and the gamut of policy responses by capital receiving countries.

9. Managing capital flows involves two important things. First, we need to make a judgment on how important the externalities are. And, second, we need to make an objective assessment of what combinations of policies may be used to minimize their impact. Now that it is broadly accepted that there could be circumstances in which controls can be a legitimate component of the policy response to surges in capital flows, policymakers must have the flexibility, and discretion, to adopt macroeconomic, prudential and capital account management policies. Importantly, they should be able to do so without a sense of stigma attached to particular instruments.

Framework for the Adjustment Process

10. Let me now move on to the third issue which is the framework for the adjustment process to secure and preserve global financial stability. The adjustment process should ensure that individual actions of countries add up to a coherent path forward. I want to emphasise two aspects of this.

First, the IMF’s surveillance function is critical - it assumes a vital, pre-emptive role in preserving global and national stability. The forthcoming Triennial Surveillance Review provides an opportunity to take stock of the steps taken and to assess recent experience, including the adequacy of the legal framework for surveillance.
Second, reserve accumulation has to be viewed in the context of economic growth and development. The insurance that reserves provide against sudden stops and reversals of capital flows far outweigh the opportunity costs of holding reserves. The experience of the crisis has amply demonstrated this. What constitutes an adequate level of reserves is a country-specific question, involving a judgment based on practical experience. Clearly, there can be no “one-approach-fits all” to such assessments.

Global Reserve Currency

11. My fourth point relates to a global reserve currency. The recent crisis has brought home the complex challenges arising from the world having a single reserve currency. In the ongoing search for solutions, one option is to have a menu of alternative reserve currencies which fulfill the required criteria – full convertibility; the exchange rate determined by market fundamentals; a significant share in world trade; liquid, open and large financial markets in the currency issuing country; and also the policy credibility to inspire the confidence of potential investors. There is a debate on whether the SDR can be a reserve currency. For the SDR to take on this significant role, several prerequisites have to be in place, which are now well known and need no elaboration here. At the present time, the SDR does not satisfy these conditions. Thus, we see the move to a multicurrency world as a gradual evolution.

Protectionism

12. The last issue I want to raise concerns protectionism. Recent international developments mark an ‘ironic reversal’ in the fears about globalization. Previously, it was the EMEs which feared that integration into the world economy would lead to welfare loss at home. Those fears have now given way to apprehensions in advanced economies that globalization means losing jobs to cheap labour abroad.

13. There is concern in some quarters that even as open protectionism has been resisted relatively well during the current crisis, covert protectionism has been on the rise. The short point is that in the years ahead, the pressures for protectionism will mount, and protectionism will also take new forms. Global welfare will be maximized when collectively we resist short-term pressures, and put our collective long-term interest ahead of individual short-term advantage.

Global Cooperation

14. Mr. Chairman, the thrust of all that I have said is that global challenges demand global solutions. The need for global cooperation in solving our most pressing problems of today is vital. The crisis has taught us that no country can be an island, and that economic and financial disruptions anywhere can cause ripples, if not waves, everywhere. The crisis also taught us that given the deepening integration of countries into the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone. The global problems we are facing today are complex, and not amenable to easy solutions. Many of them require significant, and often painful adjustments at the national level; and in a world divided by nation-states, there is no natural constituency for the global economy. At the same time, the global crisis has shown that the global economy, as an entity, is more important than ever. The IMF is central to these reforms so that it continues to spearhead and weave together the fabric of international cooperation. This is in the common interest of all of us.

LET ME SPEAK AS IF I M RBI GOVERNOR.....

Chairperson, Finance Ministers and colleague Governors,

1. After its very successful efforts at a coordinated response to the challenges emerging out of the recent unprecedented global financial crisis and safeguarding the process of economic recovery, the G-20 is now turning to the more challenging task of addressing structural imbalances in the global economy.

India has had the privilege of co-chairing, together with Canada, the G-20 collective effort towards drawing up a Framework for Strong, Sustainable and Balanced Growth.

The success of this initiative is critical for a durable global economic recovery and for better global economic and financial governance.

Importantly, the success of this initiative is also critical for the credibility of the G-20 and its ability to forge a consensus in non-crisis situations.

2. At the Seoul Summit last November, the leaders of G-20 tasked central banks to formulate indicative guidelines for the identification of persistently large imbalances requiring corrective action, including their root causes and impediments to adjustment.

Earlier this year at Paris, RBI decided to break up the exercise into an integrated two step process. For the first step, while agreeing on a set of indicators, it resolved to firm up indicative guidelines against which each of these indicators will be assessed to identify persistently large imbalances by our next meeting in April. RBI now need to finalize these guidelines and move on to the second step of the exercise. Presumably, this would focus on root causes, impediments to adjustment and corrective policies and actions.

3. Having set the context, four comments are very important to be kept in mind.

4. First, the IMF is doing a commendable job in providing timely technical inputs for our exercise. Developing the indicative guidelines requires selection of reference values or norms for each indicator, as well as rules to guide the assessment of the indicators against the norms or reference value to determine if imbalances are large. This has been done using two different methodologies – structural and statistical. While the IMF’s preference is for the structural approach because of its theoretical consistency, given the inherent fragility and contestability of econometric estimates that can deviate sharply from the observed data, the Framework Working Group has designed a method that combines these two approaches. The question we need to consider is whether there is consistency between the results of the statistical and structural approaches. If not, how do we deal with the divergences?

5. Second, in the first stage of the exercise, the criteria applied to the systemically important countries have been more stringent. The screening however has been largely mechanical though, based as it was, mainly on deviations from the mean or median. There has been no analysis, however, to check whether such deviations indeed constitute large and systemic imbalances warranting corrective action. Such a mechanical approach, without the application of mind, can lead to anomalies. Let me give two illustrations of the type of potential anomalies using India as a case study.

6. Large deviations from the mean is the criteria adopted for screening in on the basis of private savings irrespective of whether the country concerned is running a current account deficit or a current account surplus, or its stage of economic development. If, for the sake of argument, such a country was running a current account deficit and adjusted its private savings downwards, it would need to expand its current account deficit and then get screened in by the external imbalance indicators. In India, for example, our growth has been driven by domestic savings. If because of the mutual assessment process (MAP), India was asked to reduce domestic savings, it will increase our dependence on foreign savings, actually adding to imbalances. This would indeed be paradoxical.

7. The second illustration is the treatment of public debt. Instead of deviations from the mean/median, what was attempted was deviations from asymmetric reference values for developed and developing countries, with higher thresholds for developed countries. These thresholds are based on historic averages rather than on current assessments of debt sustainability related to expected or projected growth rates. The adjustment period to stabilize the debt is also very backloaded. The year 2030 is long-term enough, and to paraphrase the immortal words of Lord Keynes, many of us here may well be dead. One reason why the fiscal balance in advanced countries is so important to the global economy is that by virtue of being reserve currency issuing countries their deficits have large spillover effects.

8. There are two issues here. First, there is no justification for using different debt to GDP ratios for advanced countries and emerging and developing countries (EMDCs). If we take a forward looking view, it will be easily apparent that EMDCs will need to raise public debt to finance their development and in relative terms their public debt as a proportion of GDP will need to be higher than that of advanced countries. Second, the debt sustainability of countries should be evaluated not on some global norms, but with reference to individual country context. To what extent countries will be able to finance the servicing of their debt through higher growth should be built into the evaluation. Furthermore, the nature of debt has to be kept in view. For example, in India our public debt is predominantly domestic and therefore India’s potential to influence global systemic imbalances because of public debt is negligible if not nil.

9. The third comment I want to make has to do with how we are interpreting the intent of our leaders which was to focus on persistently large imbalances. The question I would like to raise is whether we should dissipate our energies in the second step by looking at all large imbalances, or focus instead only on large, systemically important imbalances that have significant spillover effects. Is it so difficult to identify the latter through a simple statistical exercise such as country imbalances as a proportion of total imbalances or global GDP? This way we can focus our attention on the root causes of persistently large imbalances and impediments to their adjustment as mandated by our leaders?

10. That takes me to my fourth and final comment. A question has arisen whether the Framework exercise should be looking at only net imbalances of countries or also at intra-country or intra-regional imbalances, as appropriate. The critical question to my mind is not whether imbalances are internal or external, or gross or net, but whether the concerned imbalance generates, or has the potential to generate, significant external spillovers affecting the wider global economy.

11. In conclusion, let me say that an effective outcome is needed to provide a signal that the G-20 is not only serious in ensuring strong, sustainable and balanced growth for the world economy going forward, but that it is, and it intends to remain, an effective and relevant institution for addressing current structural problems in a fast evolving global economy. Thank you.

Tuesday, April 12, 2011

ABC of JAN LOK PAL BILL

The Jan Lokpal Bill (Citizen's ombudsman Bill) is a draft anti-corruption bill drawn up by prominent civil society activists seeking the appointment of a Jan Lokpal, an independent body that would investigate corruption cases, complete the investigation within a year and envisages trial in the case getting over in the next one year.

Drafted by Justice Santosh Hegde (former Supreme Court Judge and present Lokayukta of Karnataka), Prashant Bhushan (Supreme Court Lawyer) and Arvind Kejriwal (RTI activist), the draft Bill envisages a system where a corrupt person found guilty would go to jail within two years of the complaint being made and his ill-gotten wealth being confiscated. It also seeks power to the Jan Lokpal to prosecute politicians and bureaucrats without government permission.

Retired IPS officer Kiran Bedi and other known people like Swami Agnivesh, Sri Sri Ravi Shankar, Anna Hazare and Mallika Sarabhai are also part of the movement, called India Against Corruption. Its website describes the movement as "an expression of collective anger of people of India against corruption. We have all come together to force/request/persuade/pressurize the Government to enact the Jan Lokpal Bill. We feel that if this Bill were enacted it would create an effective deterrence against corruption."

Anna Hazare, anti-corruption crusader, began a fast-unto-death today, demanding that this bill, drafted by the civil society, be adopted. The website of the India Against Corruption movement calls the Lokpal Bill of the government an "eyewash" and has on it a critique of that government Bill. It also lists the difference between the Bills drafted by the government and civil society.

A look at the salient features of Jan Lokpal Bill:

1. An institution called LOKPAL at the centre and LOKAYUKTA in each state will be set up

2. Like Supreme Court and Election Commission, they will be completely independent of the governments. No minister or bureaucrat will be able to influence their investigations.

3. Cases against corrupt people will not linger on for years anymore: Investigations in any case will have to be completed in one year. Trial should be completed in next one year so that the corrupt politician, officer or judge is sent to jail within two years.

4. The loss that a corrupt person caused to the government will be recovered at the time of conviction.

5. How will it help a common citizen: If any work of any citizen is not done in prescribed time in any government office, Lokpal will impose financial penalty on guilty officers, which will be given as compensation to the complainant.

6. So, you could approach Lokpal if your ration card or passport or voter card is not being made or if police is not registering your case or any other work is not being done in prescribed time. Lokpal will have to get it done in a month's time. You could also report any case of corruption to Lokpal like ration being siphoned off, poor quality roads been constructed or panchayat funds being siphoned off. Lokpal will have to complete its investigations in a year, trial will be over in next one year and the guilty will go to jail within two years.

7. But won't the government appoint corrupt and weak people as Lokpal members? That won't be possible because its members will be selected by judges, citizens and constitutional authorities and not by politicians, through a completely transparent and participatory process.

8. What if some officer in Lokpal becomes corrupt? The entire functioning of Lokpal/ Lokayukta will be completely transparent. Any complaint against any officer of Lokpal shall be investigated and the officer dismissed within two months.

9. What will happen to existing anti-corruption agencies? CVC, departmental vigilance and anti-corruption branch of CBI will be merged into Lokpal. Lokpal will have complete powers and machinery to independently investigate and prosecute any officer, judge or politician.

10. It will be the duty of the Lokpal to provide protection to those who are being victimized for raising their voice against corruption.

Sunday, April 10, 2011

change rules if you want to give Bharat Ratna

The calls for bestowing Sachin Tendulkar with the ‘Bharat Ratna’ may have got louder after India’s World Cup triumph but giving the country’s highest civillian honour to the batting icon would require tweaking of the criteria that has been laid down for the coveted award.

The ‘Bharat Ratna’ was started in 1954 and has so far been given to 41 eminent personalities, none of whom are sports-persons, the reason being the criteria for the coveted honour.

Constitutional expert Subhash Kashyap says given the current rules “Tendulkar does not qualify for the honour and giving the award to him would require a change in the rules.”

According to the criteria at present, the award is given for exceptional contribution in the fields of art, literature, science and social service. The criteria does not have any mention of sports.

Kashyap says the government has to decide whether it wants to include sports in the criteria for the award. The Sports Ministry will have to present such a proposal for cabinet approval.

“Once the cabinet gives its approval, the Home Ministry can bestow this honour on not just Sachin Tendulkar but any other athlete,” he said.

Indian cricket team’s prominent players such as Mahendra Singh Dhoni, Harbhajan Singh, Yuvraj Singh and Virender Sehwag have all asked for the honour to be bestowed on Tendulkar after the side’s World Cup win.

Thursday, April 7, 2011

what is JAN LOK PAL BILL????

न्यायाधीश संतोष हेगड़े, प्रशांत भूषण और अरविंद केजरीवाल द्वारा बनाया गया यह विधेयक लोगों द्वारा वेबसाइट पर दी गई प्रतिक्रिया और जनता के साथ विचार-विमर्श के बाद तैयार किया गया है। इस बिल को शांति भूषण, जेएम लिंग्दोह, किरन बेदी, अन्ना हजारे आदि का समर्थन प्राप्त है। इस बिल की प्रति प्रधानमंत्री एवं सभी राज्यों के मुख्यमंत्रियों को एक दिसम्बर को भेजा गया था।

1. इस कानून के अंतर्गत, केंद्र में लोकपाल और राज्यों में लोकायुक्त का गठन होगा।

2. यह संस्था निर्वाचन आयोग और सुप्रीम कोर्ट की तरह सरकार से स्वतंत्र होगी। कोई भी नेता या सरकारी अधिकारी जांच की प्रक्रिया को प्रभावित नहीं कर पाएगा।

3. भ्रष्टाचारियों के खिलाफ कई सालों तक मुकदमे लम्बित नहीं रहेंगे। किसी भी मुकदमे की जांच एक साल के भीतर पूरी होगी। ट्रायल अगले एक साल में पूरा होगा और भ्रष्ट नेता, अधिकारी या न्यायाधीश को दो साल के भीतर जेल भेजा जाएगा।

4. अपराध सिद्ध होने पर भ्रष्टाचारियों द्वारा सरकार को हुए घाटे को वसूल किया जाएगा।

5. यह आम नागरिक की कैसे मदद करेगा
यदि किसी नागरिक का काम तय समय सीमा में नहीं होता, तो लोकपाल जिम्मेदार अधिकारी पर जुर्माना लगाएगा और वह जुर्माना शिकायतकर्ता को मुआवजे के रूप में मिलेगा।

6. अगर आपका राशन कार्ड, मतदाता पहचान पत्र, पासपोर्ट आदि तय समय सीमा के भीतर नहीं बनता है या पुलिस आपकी शिकायत दर्ज नहीं करती तो आप इसकी शिकायत लोकपाल से कर सकते हैं और उसे यह काम एक महीने के भीतर कराना होगा। आप किसी भी प्रकार के भ्रष्टाचार की शिकायत लोकपाल से कर सकते हैं जैसे सरकारी राशन की कालाबाजारी, सड़क बनाने में गुणवत्ता की अनदेखी, पंचायत निधि का दुरुपयोग। लोकपाल को इसकी जांच एक साल के भीतर पूरी करनी होगी। सुनवाई अगले एक साल में पूरी होगी और दोषी को दो साल के भीतर जेल भेजा जाएगा।

7. क्या सरकार भ्रष्ट और कमजोर लोगों को लोकपाल का सदस्य नहीं बनाना चाहेगी?
ये मुमकिन नहीं है क्योंकि लोकपाल के सदस्यों का चयन न्यायाधीशों, नागरिकों और संवैधानिक संस्थानों द्वारा किया जाएगा न कि नेताओं द्वारा। इनकी नियुक्ति पारदर्शी तरीके से और जनता की भागीदारी से होगी।

8. अगर लोकपाल में काम करने वाले अधिकारी भ्रष्ट पाए गए तो?
लोकपाल/लोकायुक्तों का कामकाज पूरी तरह पारदर्शी होगा। लोकपाल के किसी भी कर्मचारी के खिलाफ शिकायत आने पर उसकी जांच अधिकतम दो महीने में पूरी कर उसे बर्खास्त कर दिया जाएगा।

9. मौजूदा भ्रष्टाचार निरोधक संस्थानों का क्या होगा?
सीवीसी, विजिलेंस विभाग, सीबीआई की भ्रष्टाचार निरोधक विभाग (अंटी कारप्शन डिपार्टमेंट) का लोकपाल में विलय कर दिया जाएगा।

Wednesday, April 6, 2011

India embarked on a strategy of economic reforms in the wake of a balance-of-payments crisis in 1991; a central plank of the reforms was reforms in the financial sector, and with banks being the mainstay of financial intermediation, the banking sector.

At the same time, reforms were also undertaken in various segments of financial markets, to enable the banking sector to perform its intermediation role in an efficient manner.

The thrust of these reforms was to promote a diversified, efficient and competitive financial system, with the ultimate objective of improving the allocative efficiency of resources, through operational flexibility, improved financial viability and institutional strengthening.

The reform measures in the financial sector can be envisaged as having progressed along the following lines.

First, the reforms included creating a conducive policy environment – these were related to lowering of the erstwhile high levels of statutory pre-emption in the form of reserve requirements, gradual rationalisation of the administered interest rate structure to make it market-determined and streamlining the allocation of credit to certain sectors.

Second, the efficiency and productivity of the system has been improved by enhancing competition.

Since the onset of reforms, clear and transparent guidelines were laid down for establishment of new private banks and foreign banks were allowed more liberal entry.

A precondition for new banks was that the bank had to be fully computerised ab initio.

This was done in order to infuse technological efficiency and productivity in the sector and also to serve as a demonstration effect on existing banks.

As many as ten new private banks are operating in India at present; foreign banks operating in India numbered over 30 at end-September 2005.

Competition was encouraged among public sector banks also.

Third, the ownership base in domestic banks has been broad-based.

The equity base of most public sector banks was expanded by infusing private equity, though the government continued to retain majority shareholding.

At present, public sector banks with hundred per cent government ownership comprise around 10 per cent of commercial bank assets compared to around 90 per cent at the beginning of reforms.

The share of listed private banks – both old and new – in total assets of private banks, stood at over 90 per cent at end-March 2005.

Fourth, a set of micro-prudential measures were instituted, to impart greater strength to the banking system and also to ensure their safety and soundness with the objective of benchmarking against international best practices (risk-based capital standards, income recognition, asset classification and provisioning requirements for non-performing loans as well as provisioning for ‘standard’ loans, exposure limits for single and group borrowers, accounting rules, investment valuation norms). These norms have been tightened over the years in order to gradually converge towards international best practices.

Fifth, the process of regulation and supervision has also been strengthened. A strategy of on-site inspection and off-site surveillance mechanism together with greater accountability of external audit has been instituted. This has been complemented with a process of prompt corrective action mechanism.

Sixth, in tandem with the improvements in prudential practices, institutional arrangement to improve supervision and to ensure integrity of payment and settlement systems has been put in place. As early as in 1994, a Board for Financial Supervision (BFS) was constituted comprising select members of RBI Board to pay undivided attention to supervision. The BFS ensures an integrated approach to supervision of banks, non-banking finance companies, urban cooperative banks, select development banks and primary dealers. As part of the process of ensuring a coordinated approach to supervision, a High Level Co-ordination Committee on Financial and Capital Markets (HLCCFCM) was constituted in 1999 with the Governor, RBI as Chairman, and the Chiefs of the securities market and insurance regulators, and the Secretary of the Finance Ministry as the members to iron out regulatory gaps and overlaps. To minimise settlement risks in the money, government securities and forex markets, the Clearing Corporation of India Ltd (CCIL) was established in 2002. Acting as a central counterparty through novation, the CCIL provides guaranteed settlement, thereby limiting the problem of gridlock of settlements. A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also been recently constituted to prescribe policies relating to oversight of the financial infrastructure relating to payment and settlement systems. Finally, to address the systemic risks arising from growth of financial conglomerates, the RBI has put in place an oversight framework which envisages periodic sharing of information among the concerned regulatory bodies.

Seventh, the legal environment for conducting banking business has also been strengthened. Debt recovery tribunals were introduced early into the reforms process exclusively for adjudication of delinquent loans in respect of banks. More recently, an Act to enforce securities and recover loans was enacted in 2003 to enhance protection of lenders rights. To combat the menace of crime-related money, the Prevention of Money Laundering Act was enacted in 2003 to provide the enabling legal framework. The Credit Information Companies (Regulation) Act, 2004 has recently been enacted by the Parliament which is expected to enhance the quality of credit decision making. The Government is considering several major legal amendments to enhance the powers of the RBI. Major changes relate to removal of the restrictions on voting rights in banks, providing legal basis for consolidated supervision, removal of the floor of 25 per cent in respect of statutory liquidity ratio and empowering the RBI to supercede the board of a banking company.

Eighth, the reforms have focused on adopting appropriate processes in order to ensure development of various segments of the markets. In the banking sector, the Indian Banks' Association (IBA) has emerged as an important self-regulatory body working for the growth of a healthy and forward-looking banking and financial services industry. In the debt market segment, the RBI interacts closely with Fixed Income Money Market Dealers Association of India (FIMMDA) and the Primary Dealers Association of India (PDAI) for overall improvement of government debt markets and promoting sound market practices. With regard to the payments system infrastructure, the introduction of the Real Time Gross Settlement (RTGS) system since 2004 has made it possible for large value payments to be transacted in a faster, efficient and secure manner. In order to enhance transparency of secondary market trades in government securities, a screen based anonymous order matching system has been operationalised.

Ninth, the banking system has also witnessed greater levels of transparency and standards of disclosure with greater volume of information being disclosed as Notes on Accounts in their balance sheets. Salient among these include major profitability and financial ratios, details of capital structures, as well as movements in non-performing loans, movements in provisions, advances to sensitive sectors, to mention a few. The range of disclosures has gradually been expanded over the years to promote market discipline.

Tenth, corporate governance in banks has improved substantially over the years. A Consultative Group was constituted to explore the issue in all its facets in accordance with best extant practices. Based on its recommendations, in June 2002, banks were advised to adopt and implement appropriate governance practices. As part of its efforts to promote sound corporate governance, the RBI has been focusing on ensuring 'fit and proper' owners and directors of the bank and laying stress on diversified ownership. Banks have been advised to ensure that a nomination committee screens the nominated and elected directors to satisfy the 'fit and proper' criteria.

III. Features of Reforms

The unique features of the progress in financial sector reforms may be of some interest to this audience. First, financial sector reforms were undertaken early in the reform cycle. Second, the reforms process was not driven by any banking crisis, nor was it the outcome of any external support package. Third, the design of the reforms was crafted through domestic expertise, taking on board the international experiences in this respect. Fourth, the reforms were carefully sequenced in respect to instruments and objectives. Thus, prudential norms and supervisory strengthening were introduced early in the reform cycle, followed by interest rate deregulation and gradually lowering of statutory pre-emptions. The more complex aspects of legal and accounting measures were ushered in subsequently when the basic tenets of the reforms were already in place.

A unique feature of the reform of public sector banks, which dominated the Indian banking sector, was the process of financial restructuring. Banks were recapitalised by the government to meet prudential norms through recapitalisation bonds. The mechanism of hiving off bad loans to a separate government asset management company was not considered appropriate in view of the moral hazard. The subsequent divestment of equity and offer to private shareholders was undertaken through a public offer and not by sale to strategic investors. Consequently, all the public sector banks, which issued shares to private shareholders, have been listed on the exchanges and are subject to the same disclosure and market discipline standards as other listed entities. To address the problem of distressed assets, a mechanism has been developed to allow sale of these assets to Asset Reconstruction Companies which are in the private sector and operate as independent commercial entities.

In terms of the processes also, certain interesting features of the reforms are in evidence. The first has been its gradualism, wherein reforms were undertaken only after a process of close and continuous consultation with all stakeholders. This participative process with wider involvement not only encouraged a more informed evaluation of underlying content of policies but also enhanced the credibility of policies and generated expectations among economic agents about the process being enduring in nature. The second has been a constant rebalancing of reform priorities predicated upon the domestic and global business environment, institution of prudential practices, upgradation of the regulatory and supervisory framework, institution of appropriate institutional and legal reforms and the state of openness of the economy. The third important feature of the reforms has been its harmonisation with other policies dictated, among others, by the state of preparedness of the financial sector and above all, the underlying macroeconomic environment. Fourth, the reforms have progressed with emphasis on the common person with the aim of developing a system that is responsive to the needs of all sections of society.

IV. Assessment of Impact

How useful has been the financial liberalisation process in India towards improving the functioning of markets and institutions? First, with the development of appropriate market regulation and associated payment and settlement systems and the greater integration into global markets, the financial markets have witnessed rapid growth and robustness. A range of instruments in domestic and foreign currency are traded in financial markets. In addition, the market in corporate bonds has been spurred with increased use of external credit ratings. Further, derivative products covering forwards, swaps and options as also structured products are transacted enabling corporates and banks to manage their risk exposures. The market in securitised paper both mortgage backed and asset backed securities has also grown significantly supported by a well developed credit rating industry. Second, liberalisation in financial sector has led to emergence of financial conglomerates since banks have diversified their activities into insurance, asset management securities business, etc. Third, prudential regulation and supervision has improved; the combination of regulation, supervision and a better safety net has limited the impact of unforeseen shocks on the financial system. In addition, the role of market forces in enabling price discovery has enhanced. The dismantling of the erstwhile administered interest rate structure has permitted financial intermediaries to pursue lending and deposit taking based on commercial considerations and their asset-liability profiles. The financial liberalisation process has also enabled reduction in the overhang of non-performing loans: this entailed both a ‘stock’ (restoration of net worth) solution as well as a ‘flow’ (improving future profitability) solution. The former was achieved through a carefully crafted capital infusion from the fisc, which aggregated, on a cumulative basis, to about one per cent of GDP; the flow solution, on the other hand, necessitated changes in the institutional and legal processes which were implemented over a period of time.

Moreover, financial entities have become increasingly conscious about risk management practices and have instituted risk management models based on their product profiles, business philosophy and customer orientation. Additionally, access to credit has improved, through newly established domestic banks, foreign banks and bank-like intermediaries. Moreover, government debt markets have developed, enabling RBI to undertake monetary policy more effectively, providing options to banks for liquidity management and allowing less inflationary finance of fiscal deficits. The growth of government debt markets has also provided a benchmark for private debt markets to develop.

There have also been significant improvements in the information infrastructure. The accounting and auditing of intermediaries has strengthened. Availability of information on borrowers has improved which will help reduce information asymmetry among financial entities. The technological infrastructure has developed in tandem with modern-day requirements in information technology and communications networking. Moreover, the concept of finance has permeated across various institutions and a 'finance view' of all market transactions has emerged. Finally, the quality of human capital involved in the financial sector has typically been of the highest genre, facilitating non-disruptive progress of the reforms process.

The improvements in the performance of the financial system over the decade-and-a-half of reforms are also reflected in the improvement in a number of indicators. Capital adequacy of the banking sector recorded a marked improvement and stood at 12.8 per cent at end-March 2005, comparable to 13.0 per cent for the US during the same period. Typically, the capital adequacy position of developed countries has remained range-bound within 10-14 per cent and judged from that standpoint, our capital position compares favourably with those numbers.

On the asset quality front, notwithstanding the gradual tightening of prudential norms, non-performing loans (NPL) to total loans of commercial banks which was at a high of 15.7 per cent at end-March 1997 declined to 5.2 per cent at end-March 2005. These figures are broadly comparable to those prevailing in several leading European economies (like Italy, Germany and France) which typically ranged within 4-7 per cent of total loans and lower than those in most Asian economies, although they were higher than those prevailing in countries such as, the US, Canada and Australia. Net NPLs also witnessed a significant decline and stood at 2.0 per cent of net advances at end-March 2005, driven by the improvements in loan loss provisioning, which comprises over half of the total provisions and contingencies.

Operating expenses of banks in India are also much more aligned to those prevailing internationally, hovering around 2.21 per cent during 2003-04 (2.16 per cent during 2004-05). In developed countries, in 2004, banks' operating expenses were 3.5 per cent in the US and 2.8 per cent in Canada and Italy and 2.6 per cent in Australia, while they were in the range of 1.1 to 2.0 per cent in banks of other developed countries such as Japan, Switzerland, Germany and the UK. Bank profitability levels in India as indicated by return on assets have also shown an upward trend and for most banks has been a little more than one per cent.

Incidentally, the turnaround in the financial performance of public sector banks has resulted in the market valuation of government holdings far exceeding the recapitalisation cost. The Indian experience has shown that a strong regulatory framework which is non-discriminatory, market discipline through listing on stock exchanges and operational autonomy has had positive impact on the functioning of the public sector banks.

V. Work in Progress

Financial sector reform is a continuous process that needs to be in tune with the emerging macroeconomic realities and the state of maturity of institutions and markets, mindful of financial stability. In this changing milieu, there are several areas which are being addressed now.

The first issue pertains to capital account convertibility. In view of the rapid changes that have taken place over the last few years and the growing integration of the Indian economy with the world economy, the RBI has recently set up a Committee comprising eminent policymakers, financial sector experts and academia to suggest a roadmap for fuller capital account convertibility. The Committee is required to, in this context, examine the implications of fuller capital account convertibility on monetary and exchange rate management, financial markets and financial system.

The second issue relates to the fiscal area. The institution of the rule-based fiscal policy, as envisaged in the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) has been on revenue-led fiscal consolidation, better expenditure outcomes and rationalisation of tax regimes to remove distortions and improve competitiveness of domestic goods and services in a globalised economic environment. In this context, the RBI has refrained from participating in the primary issues, except in exceptional circumstances. These de factoarrangements, which have been working satisfactorily for some period, have come into effect through legislative sanction effective April 1, 2006. While Central Government restated its commitment to fiscal consolidation as per FRBM Act, several state governments have enacted legislation on similar lines while some others are in the pipeline.

An important issue, specifically relating to the banking sector, is consolidation. Despite the liberalisation process, the structure of the Indian banking system has continued without much change though development finance institutions were merged with banks. The consolidation process within the banking system in recent years has primarily been confined to a few mergers in the private sector segment induced by financial position of the banks. Some mergers may take place in future for compliance with minimum net worth requirement or norms on diversified ownership. The RBI has created an enabling environment by laying down guidelines on mergers and acquisitions. As the bottom lines of domestic banks come under increasing pressure and the options for organic growth exhaust themselves, banks will be exploring ways for inorganic expansion.

The fourth aspect is the role of foreign banks. In terms of assets, the share of foreign banks has roughly been around a quarter within the non public sector banking category. They are dominant in certain segments, such as, the forex market and the derivatives market, accounting for over half of the off-balance sheet exposure of commercial banks. The RBI had, in February 2005, laid down clear and transparent guidelines which provide a roadmap for expansion of foreign banks. As it stands at present, foreign ownership in domestic banks is quite significant. In several new private banks, this share is well over 50 per cent; these banks account for around half of the total assets of domestic private banks. Even in several public sector banks, the extent of foreign ownership within the private holding is close to that of the domestic private holding.

The fifth issue pertains to Basel II. Commercial banks in India are expected to start implementing Basel II with effect from March 31, 2007 though a marginal stretching is not ruled out in view of the state of preparedness. They will initially adopt Standardised Approach for credit risk and Basic Indicator Approach for operational risk. After adequate skills are developed, both at the banks and also at supervisory levels, some banks may be allowed to migrate to the Internal Rating Based (IRB) Approach. Under Basel II, Indian banks will require larger capital mainly due to capital required for operational risk. The RBI has introduced capital instruments both in Tier I and Tier II available in other jurisdictions. In addition, the RBI is involved in capacity building for ensuring the regulator’s ability for identifying and permitting eligible banks to adopt IRB / Advanced Measurement approaches.

The sixth aspect is the role of capital in case of regional rural banks (RRBs) and cooperative banks, which provide banking services primarily in the rural and semi-urban areas. The problems with regard to this segment have been widely documented: these include constraints on timely credit availability, its high cost, neglect of small farmers and continued presence of informal lenders. It is argued that most part of the cooperative credit structure is multi-layered, undercapitalised, over-staffed and under-skilled, often with high level of delinquent loans. The RRBs also appear to share these problems, although there are several viable institutions in this category. These are being addressed on a priority basis. A national-level committee had recently made recommendations to revive and restructure the rural cooperative credit structure. These have been accepted by the government which has set up a National Level Implementation and Monitoring Committee under the Chairmanship of the Governor for overall guidance in implementation. A process of revitalising RRBs and urban cooperative banks in a medium-term framework is also underway.

Seventh, we are adopting a three-track approach with regard to capital adequacy rules. On the first track, the commercial banks are required to maintain capital for both credit and market risks as per Basel I framework; cooperative banks on the second track are required to maintain capital for credit risk as per Basel I framework and surrogates for market risk; RRBs on the third track which though subject to prudential norms do not have capital requirement on par with the Basel I framework. In other words, a major segment of systemic importance is under a full Basel I framework, a portion of the minor segment partly on Basel I framework and a smaller segment on a non-Basel framework. Even after commercial banks begin implementing Basel II framework in March 2007, we may witness Basel I and non-Basel II entities operating simultaneously. This would not only ensure greater outreach of banking business, but also, in the present scenario of high growth, enable them to usefully lend to the disadvantageous sections and successfully pierce the informal credit segment.

The eighth issue of relevance is that of financial inclusion. While resource limitations experienced by low-income households will continue to constrain their access and use of financial products, the challenge remains for developing appropriate policies, procedures and products that can overcome this difficulty within the bounds of resource constraints. Apart from greater latitude in the range of identity documents that are acceptable to open an account, there is also a need for independent information and advisory service. This needs to be supplemented by nurturing appropriate public-private partnerships. Some development to this effect is already evidenced in the significant growth and development of micro-finance activities. Self-help groups formed by non-government organisations and financed by banks represents an important constituent of this development process in India.

As part of its ongoing efforts to encourage greater financial inclusion, the Annual Policy Statement released in April 2006, gives particular attention to issues relating to farmers. A beginning has already been made to ensure greater outreach of banking facilities in rural areas through appointment of reputed non-governmental organisations (NGOs) / post offices, etc., as banking facilitators and banking correspondents. A Working Group has also been proposed to ensure greater outreach of banking facilities in rural areas and to ensure availability of bank finance at reasonable rates. A Working Group has also been proposed to suggest measures for assisting distressed farmers, including provision of financial counselling services and introduction of a specific Credit Guarantee Scheme under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. The convenors of the State Level Bankers Committee in all States/Union Territories have been advised to identify at least one district in their area for achieving 100 per cent financial inclusion by providing a 'no-frills' account and a general purpose credit card (GCC). A Technical Group has also been proposed to renew the existing legislative framework governing money lending and its enforcement machinery so as to provide for greater credit penetration by the financial sector in the rural areas at reasonable rates of interest.

The final area that has gained prominence in the recent past relates to customer service. The focus of attention is on basic banking services provided to the common persons and the need for ensuring effective customer grievance redressal as also fair practice code. A Banking Ombudsman facility has been established covering all States and Union Territories for redressal of grievances against deficient banking services. The recently constituted Banking Codes and Standards Board of India is an important step in this regard which is expected to ensure that the banks formulate and adhere to their own comprehensive code of conduct for fair treatment of customers. Additionally, constitution of a Working Group has been proposed in the latest policy to formulate a scheme for ensuring reasonableness of charges offered by banks on its various services.

It is widely acknowledged that India is the repository of the best of human skills, especially in the financial sector. The technological competence of the Indian workforce is perhaps presently part of folklore. The present levels of growth optimism about the economy suggest that India is expected to remain one of the important growth drivers of the global economy in the near future. The financial infrastructure and regulatory framework in the country are broadly on par with those prevailing internationally. We are working towards evolving a globally competitive banking sector, stressing on banking services relevant to our socio-economic conditions and contributing to both growth and stability.

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