The Union Finance Minister, Shri Pranab Mukherjee has said that the resilience shown by Indian economy during the global crisis reflects a maturing of the economic management of the country and the growing competitiveness of our enterprise. The overall GDP growth of 8.9 per cent in the first half of 2010-11 takes us back on a high growth path that the economy was traversing on in the years prior to the crisis, however, concern on inflation remains, he said. Mentioning that India’s growth momentum, to some extent, is affected by the developments in the Western World, he said that a faster recovery in the West will benefit all. Shri Mukherjee was speaking at the inaugural session of Second International Finance Conference, organized by IIM Calcutta in Kolkata today.
Referring to FSDC, set up by the Government to strengthen and institutionalize the mechanism for maintaining financial stability, Shri Mukherjee said that the Government will also set up a Financial Sector Legislative Reforms Commission (FSLRC) to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector. He said that Government has accorded high importance to financial inclusion as it is a key determinant of sustainable and inclusive growth. The Government is committed to provide access to affordable financial services, especially credit and insurance to empower the poor and to enable the unbanked to become vibrant and productive participants in the process of economic growth, he said.
Highlighting India’s compliance with most of the internationally accepted standards in banking, securities markets and insurance sector, the Finance Minister stated that we have voluntarily sought a full-fledged financial sector assessment programme (FSAP), an international evaluation exercise conducted by the IMF and the World Bank. The Finance Minister said that the country, today, is in a position to sustain high economic growth in the coming decades and create a more inclusive outcome for the society and emphasized Government’s commitment to take the reform process forward.
Following is the text of the speech of Finance Minister, Shri Pranab Mukherjee delivered at the Second International Finance Conference at IIM Calcutta:
“It gives me great pleasure to be here today at the Indian Institute of Management-Calcutta, for the inaugural session of the Second International Finance Conference.
The recent global developments underscore the importance of understanding and regulating the financial markets and the innovative financial products in the interest of sustaining growth and development. We have seen how unfettered growth of financial sector can have dangerous implications for the real sector, both in the developed and the developing world. There is much that we need to know about their functioning, the best practices that underpin the creation of new financial products and the oversight issues so as to promote financial stability. I am very happy to know that this prestigious institution has recently set up a state-of-the-art facility to pursue these issues and ensure that the mangers of tomorrow are better equipped to work in this highly complex and dynamic area of our economies.
Following the global financial crisis and one of the deepest economic downturns that the world has witnessed in recent times, we are compelled to rethink some of our traditional principles of economic and financial policy making. For the first time after the World War II, nations have been forced to come together to explore and discuss the need for collective action, the need to regulate finance in a globalized world and the need to reform the international economic architecture. When that happens there is hope! We are together and engaged in finding ways to ensure better regulation of markets, strengthening the monitoring and response mechanisms to global developments and promoting growth in a sustainable manner. At the same time, countries in the developed and the developing world have adopted revival strategies in keeping with the needs of their respective contexts.
The US has pursued quantitative easing with a view to boost recovery and reduce their unemployment levels. Recent data shows some signs of improvement, especially in respect of real GDP growth and consumer confidence, even though unemployment rate continues to be a cause for worry. In case of Europe, there are some concerns, with Ireland seeking help from the European Union and the International Monetary Fund. A few other countries in the European Union may also be facing sovereign debt problems. There are some concerns on the strength of the post-crisis revival in these economies. However, major emerging market economies are experiencing robust growth, though serge in capital inflows and inflation, including from the hardening of global commodity price, is a source of worry. On the whole, 2011 should see an improvement in the world economy.
We have been more fortunate in surviving the crisis without major disruptions and have recovered our growth momentum much faster than most others. In the first half of 2010-11 the Indian economy recorded an overall GDP growth of 8.9 per cent which takes us back on the high growth path that the economy was traversing on in the years prior to the crisis. The concern on inflation remains. India’s growth momentum, to some extent, is affected by developments in the western world. A faster recovery in the west is in the interest of all.
This resilience that India has demonstrated in recent times reflects a maturing of the economic management of the country and the growing competitiveness of our enterprise. This has happened even as the economy has become more integrated with global markets. It shows that globalization and economic resilience can go hand in hand.
In the post-crisis period, financial stability has become an integral part of policy discussions and macroeconomic objectives globally. The term ‘financial stability’ refers to a persistent state of robust functioning of various financial system components – markets, institutions and market infrastructure. It involves strengthening of the system to face any financial shocks with minimal disruptive impact. There is a process aspect which requires a rigorous, comprehensive and continuous systemic assessment of risk buildup across the financial system. Also an outcome aspect focused on having the necessary institutional and instrumental arrangements to take effective regulatory, supervisory and other policy measures to address the identified risks. A sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure are the pre-requisites for financial stability.
As a part of the reforms in the financial sector in India, we have setup an apex-level Financial Stability and Development Council (FSDC), with a view to strengthen and institutionalise the mechanism for maintaining financial stability. Without prejudice to the autonomy of market regulators, this Council would undertake macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It would also focus on financial literacy and financial inclusion. We have also decided to set-up a Financial Sector Legislative Reforms Commission (FSLRC) to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector.
The banking system has come into sharper focus after the global crisis. The fact that India has not gone through any financial turbulence, as a result of the earlier phase of financial deregulation is a testimony to our consistent view that reforms in global standards have to be adapted to local conditions. However, the cost of banking intermediaries in India is high and bank penetration is limited to only a few customer segments and geographies. We are trying to address this in collaboration with the Reserve Bank of India.
Innovation is conducive to economic growth, but growth must be inclusive, particularly for us. Financial inclusion is a key determinant of sustainable and inclusive growth. Access to affordable financial services – especially credit and insurance – enlarges livelihood opportunities and empowers the poor to take charge of their lives. Such empowerment aids social and political stability. It is critical to connect the banked and the unbanked sectors and enable the unbanked to become vibrant and productive participants in the process of economic growth. We have accorded high importance to financial inclusion to cover the entire gamut of financial services pertaining to savings, credit, insurance and transfers.
India did a self assessment (CFSA) of its financial sector in 2009. I am proud to state that according to this exercise, India is compliant with most of the internationally accepted standards in banking, securities markets and insurance sector. This has given us the confidence to get our financial sector evaluated by international financial institutions like the IMF and the World Bank. I am happy to state that we have voluntarily sought a full- fledged Financial Sector Assessment Programme (FSAP) which is an international evaluation exercise conducted by the IMF and the World Bank.
The global economic crisis has posed many questions for economic and financial models. There are theories based on assumption of rational economic agents and perfect information and that market always returns to equilibrium. Most of these assumptions do not hold good in the real world. The crisis has amplified the need for greater research in the fields of economics and financial analysis. This is where institutes like yours could play a key role. We need to draw the right lessons from developments around the world. We need to innovate, while at the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take risks. It must be recognized that all financial innovation is not necessarily destructive or inimical to financial stability.
Inclusion, growth, and stability as the three objectives of any reform process, and fortunately, these objectives are not in contradiction. With the right reforms, the financial sector can be an important vehicle for encouraging enterprise and ensuring the overall well-being of the people. The global crisis has offered the opportunity to revisit the conventional wisdom in many areas and review the approach to financial sector reforms. I hope all of us take advantage of this opportunity and move towards creating a more equitable and progressive world.
Today, as I stand before you, I am confident that we are in a position to sustain high economic growth in the coming decades and create a more inclusive outcome for our society. The Indian Government is committed to taking the reforms process forward. I have faith in the Indian entrepreneurial spirits and we have the political will to do the needful to sustain the present momentum of our economy.”