Better global governance need of the hour, says RBI

One of the lessons emerging from the global financial crisis was the need for a better system of governance to manage the challenges of globalisation, especially for countries like India and Sri Lanka where growth opportunities were unlimited, said KC Chakrabarty, deputy governor of the Reserve Bank of India (RBI).

“A global crisis of this magnitude does not help in creating and expanding opportunities for over 2 billion population in the world who live under abject poverty. That is an important reason why countries like India and Sri Lanka must demand a better global governance system to manage the challenges of globalisation,” Chakrabarty said in a seminar in Sri Lanka last week.

He said that a large part of the population in these countries contributed much below their potential because of the lack of opportunities, and if the policy environment could provide the right opportunities with appropriate incentives, growth prospects could improve significantly.

Highlighting the need for focusing on financial inclusion for making a fail-proof financial stability architecture in the post-crisis period, Chakrabarty said that the demographic advantage of the country might turn out to be a curse if opportunities were not created for everybody. “Finance has a key role in addressing this challenge, unlike its role we experienced in the advanced economies where a few could maximise individual returns, but easily socialise the costs of their actions,” he said.

For strengthening the financial stability architecture, Chakrabarty said that it was agreed in the G-20 meeting in London that more and better quality of capital was the best first line of defence against financial crisis.

The G-20 meet also emphasised the introduction of counter-cyclical buffers during good times to strengthen resilience during bad times, he said. He also said convergence towards a single set of high quality, global, independent accounting standards for financial instruments, loan-loss provisioning, off-balance sheet exposures and the impairment and valuation of financial assets were key for financial stability as discussed during the G-20 meeting.

The deputy governor admitted that decision on when to exit the expansionary monetary policy was becoming increasingly complex as the signs of economic recovery were still tentative while prices were rising.

Chakrabarty also reminded that though exit from expansionary policy remained a key challenge, the challenge has to be viewed in the context of the ultimate objective of a faster and durable recovery of economic growth. “The costs of delay in timely exit are being discussed now; but there are costs of delay in economic recovery as well. The policy choices are becoming increasingly complex for the RBI,” he said. The central bank, which projects 6 per cent GDP growth with an upward bias for the current financial year, feels that rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance.

“The medium-term objective is to revert to the high growth path of around 9 per cent. This growth trajectory also should be inclusive with low and stable inflation,” Chakrabarty said.