Supporting Explosive Growth: Effective Linkages between the Banking Sector and Real Sector

Supporting Explosive Growth: Effective Linkages between the Banking Sector and Real Sector (Keynote Address delivered by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Inaugural Session of the 8th Annual Banking Summit organised by the ASSOCHAM at New Delhi on November 21, 2012)

Introduction Shri Rajkumar Dhoot, Hon’ble Member of Parliament and President, ASSOCHAM, Shri M. Narendra, Chairperson, ASSOCHAM National Council for Banking & Finance and CMD, Indian Overseas Bank, Shri Sunil Kanoria, Vice President, ASSOCHAM and Vice Chairman, SREI Infrastructure Finance Ltd.; Mrs. Shubhada Rao, Senior President and Chief Economist, Yes Bank Ltd.; Mr. Subhash C Aggarwal, CMD, SMC Group; Ms. Sudha Ravi, Co-Chairperson, ASSOCHAM National Council for Banking & Finance and CEO, PHL Finance Ltd., Shri D. S. Rawat, Secretary General, ASSOCHAM, distinguished guests, ladies and gentlemen. It is a pleasure and privilege to be here at the 8th Annual Banking Summit organized by the ASSOCHAM on the theme “Poised for Explosive Growth”. Present Scenario 2. Post the wide ranging structural reforms of the 90s, the Indian economy has, until recently, been churning out impressive growth rates and is now firmly ensconced in the exclusive club of countries with GDP in excess of one trillion US dollars. However, as the dark clouds of economic gloom hover above the horizon with doomsayers painting a dismal picture for the future of the world economy, time is ripe for taking a hard look at the economic outlook for India at the present juncture and examine what we need to do in order to keep the Indian growth juggernaut rolling. 3. The pundits of doom are having a field day as the global scenario remains bleak with the Eurozone slipping into recession once again and the debt crisis continuing to batter southern Europe and gnawing at the economic performance of export driven Germany. An ebullient America had seen some green shoots of recovery, but the unemployment numbers, since, have not been encouraging and it is now facing a fiscal cliff. On the domestic front, though it is not all clear skies and sunshine with the growth engine slowing down, the growth is still way above that of the developed countries. India has been largely protected from the global economic crisis through a combination of strong regulation and supervision and policies which leaned against the wind and best suited our country, society and culture. Having said that, we cannot claim to have remained totally immune from global headwinds. The Indian economy, which had accelerated since the reforms, recording a growth of more than 9% before the crisis, has slumped to 5.5% in the first quarter of 2012 -13, with sequential downward revisions in estimated growth rate, which is now expected to clock around 5.8% in 2012-13. This, however, is a far cry from our actual potential. 4. With economic liberalization, we have moved away significantly from the ‘Hindu rate of growth’ which had stagnated around 3.5% during 1950-80. According to Dun & Bradstreet report titled ‘India 2020’, India is poised to become a $ 5.6 trillion economy by the year 2020. The report adds that Maharashtra, Gujarat and Andhra Pradesh will be amongst the most developed states in the country by 2020 and would, together, contribute 32 per cent of the overall GDP. The states which were, hitherto, lagging behind such as Madhya Pradesh, Bihar, Orissa, Rajasthan and Uttar Pradesh, are also expected to contribute significantly to India’s growth story during the current decade. 5. The 11th Five Year Plan carried the objective of faster and more inclusive growth. Rapid GDP growth, targeted at 9.0 per cent per annum, was regarded necessary to generate income and employment opportunities for improving living standards of the masses and to generate the requisite resources for financing social sector programmes aimed at reducing poverty and enabling inclusiveness. The economy performed well on the growth front, averaging 8.2 per cent in the first four years. Growth in 2011-12, the final year of the Eleventh Plan, which was originally projected at around 9.0 per cent, continuing the strong rebound from the crisis, was eventually recorded at 6.5 per cent. The slowdown of the economy in 2011-12 compared to the previous year was a phenomenon common to all major economies. 6. Undoubtedly, there has been a decline in growth, which cannot be solely attributed to the global slowdown. A part of it can be traced to domestic infrastructural and governance issues. The twin deficits, inflation and the supply side bottlenecks are some concerns that need to be quickly tackled to spur growth. The poser before India at this juncture is whether we can afford to relapse to the Hindu rate of growth and be content with being considered an emerging nation forever, or should we make efforts to take our due position among the leaders in the world arena? We cannot and must not revert to the Hindu rate of growth. 7. In order to overcome these challenges, we need to focus on the key areas of productivity, innovation and reforms, both at the level of the macro economy and at the individual firm/ enterprise level. These will help us overcome the various bottlenecks currently shackling our growth and put us firmly on the path of sustained high economic growth. It will ensure that we are able to leverage our strengths, some of which I would be alluding to subsequently, in order to create a conducive growth environment. These reforms need to involve all stakeholders and should, necessarily, leverage on technology, which has the potential to act as a force multiplier in our efforts towards productivity, innovation and reforms. I see that some of these topics would be the focus of the technical sessions slated for later in the day. I am sure these sessions will deliberate on how the various measures could be implemented in an effective and time bound manner. 8. The role of the financial sector in any economy is to subserve the needs of the real economy. Consequently, if the Indian economy has to fully realize its optimum potential, the financial sector would have to play a pivotal part. As we all know, our financial sector is predominantly bank-centric and therefore, the performance of the banking sector is crucial to the fate of the economy. The Indian banking system has come a long way since the Financial Sector Reforms, with the banks having served the economy remarkably well over the last two decades. Liberalization has resulted in greater autonomy for banks in business decisions, but with the concomitant responsibility of conducting business in line with the highest standards of corporate governance, customer service and a commitment to nation building, which encompasses financial inclusion. 9. There is no doubt in my mind that if the economic growth engine has to churn out a powerful performance, banks would, necessarily, have to be the prime mover. The domestic credit provided by the banking sector in India stands at an abysmally low level compared to many of our emerging Asian peers, let alone the advanced economies. There is enormous scope for the banks to expand their business to areas/sectors hitherto lacking formal credit. Domestic Credit of the Banking Sector to GDP (in %) 10. Banks have to develop the ability to maintain high growth levels over a sustained period of time. They also need to develop strong linkages with the real sector. These linkages should critically determine all aspects of banking operations including the kind of products and services offered, the pricing strategies, delivery channels adopted, sectors/ sub-sectors receiving focused attention, technology platforms adopted, etc. This linkage with the real sector will ensure relevance of banks as a key pillar in the economic system and enable them to fully meet their crucial role in nation building. Besides, by ensuring that the financial system grows in tandem with the real sector, build up of systemic risk through creation of asset price bubbles can be avoided. This lack of linkage between the financial system and the real sector was one of the critical factors contributing to the global financial crisis and hence, the importance of this linkage has been one of our important learnings from the crisis. What are our strengths? Demographic Dividend 11. Sometimes, like the mythological Hanuman, we need to be reminded of our strengths, first and foremost of which is the great demographic dividend that the country enjoys. India has a young population not only in comparison to advanced economies but also in relation to the large developing countries. According to the Approach Document to the Twelfth Five Year Plan, the labour force in India is expected to increase by 32 per cent over the next 20 years, while it will decline by 4 per cent in industrialized countries and by nearly 5 per cent in China. This ‘demographic dividend’ can lead to sustainable long term growth, provided two conditions are fulfilled. One, higher levels of health, education and skill development must be achieved. Two, an environment must be created in which the economy not just grows rapidly, but also promotes inclusion by generating good quality employment/ livelihood opportunities to meet the needs and aspirations of the youth. The demographic dividend has payoffs in creating a skilled, technology savvy work force, strong customer base and higher savings rates, thereby increasing the resources available for productive investments. The progress made in the field of education and literacy is leading our transformation from being the world’s back office to being a knowledge partner. Potential for Inclusive Growth 12. A recent internal study conducted by the Reserve Bank on the profile of customers of banks has heartening indicators. With increasing number of bank branches, the average population per bank branch has improved from 15,583 in 2001 to 12601 in 2012. As per latest census, 58.7 percent households were availing of banking services in 2011 as compared to 35.5 percent in 2001. With liberalization of the branch licensing policy and drive towards financial inclusion, the share of rural and semi urban branches in total new branches opened reached 69.8 percent during 2011-12 from a mere 23.2 percent in 2004-05.The share of hitherto unbanked centres in newly opened branches has been around 20 percent during 2011-12. Further efforts are required and are being made in view of the large number of unbanked centres in the country. The Reserve Bank has been encouraging banks to improve banking penetration through the Business Correspondent (BC) model, allowing ‘for-profit organizations’ to work as BCs, leveraging technology, including mobile technology, to deliver banking services as part of the drive to enhance financial inclusion. While there has been some progress, more ground needs to be covered before we achieve the goal of meaningful financial inclusion. The extent of financial exclusion is high when compared to some of the advanced as well as developing countries. In a cross country analysis of financial inclusion, we compare poorly at 10.64 branches and 8.90 ATMs per 0.1 million adults, say, as against Brazil, which has 46.15 branches and 119.63 ATMs per 0.1 million of the population. In this vast financially excluded populace lies our opportunity! 13. Growth, merely in terms of numbers, would not carry any meaning unless it reaches every section of society - the vulnerable, underprivileged and the marginalized. Public sector banks as well as RRBs have played a key role in expanding the branch network to rural India. However, since it has been observed that the benefits of Government schemes often do not reach the intended beneficiaries, Reserve Bank has been encouraging banks to implement Electronic Benefits Transfer (EBT). Since many such social security beneficiaries reside in villages with population of less than 2000, RBI has been giving thrust on expanding the benefits of EBT to all villages. SLBC convenor banks have, therefore, been advised to prepare a roadmap covering all unbanked villages with population of less than 2000 and allocate these villages to various banks for providing banking services in a time bound manner. Besides, banks also need to provide a BC touch point in each village, where brick and mortar branches are not available, for extending the provision of EBT services at the earliest. BCs could also provide door step services to EBT beneficiaries through regular visits to villages, thereby ensuring that all kinds of banking facilities are available in the long run through a mix of brick and mortar branches and BC networks. We have also recommended the one district-many banks-one leader bank model in our “Operational Guidelines for Implementation of EBT and its Convergence with Financial Inclusion Plan”, which would expedite implementation of EBT in a simple and scalable manner. Banks need to wholeheartedly work towards achieving these goals, not as a CSR activity, but rather by seeing this as a viable and profitable business opportunity. Likewise, banks should also pursue extending banking services like opening of Basic Savings Bank Deposit Accounts, etc. as a potential business proposition and not as a regulatory burden. It is in banks’ own interest to realize early that the population mass concentrated in financially excluded centers has the potential to drive their future growth and profitability and help place the economy in the fast track mode! Infrastructure Financing- Huge Potential 14. Stimulating growth puts the spotlight on developing infrastructure - an efficient public transport system, roads, public utility services, housing, educational institutions, locomotive plants, ports, container terminals, etc. - the entire gamut, which forms the backbone of any developing country. The increasing infrastructure requirements to support a growing economy call for enormous investment. A McKinsey estimate suggests that each year we may have to build about 700 - 900 million square meters of residential and commercial space, 350-400 km of metros and subways and 19000-25000 km of roads - a massive task and an equally massive opportunity for banks. The Approach Paper to the 12th Plan estimates that infrastructure investment will need to increase from about 8.0 per cent of GDP in the base year (2011-12) of the Plan to about 10.0 per cent of GDP in 2016-17. The total investment in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion during the Twelfth Plan period. 15. Financing this level of investment will require larger outlays from the public sector, but this has to be coupled with a more than proportionate rise in private investment. Private and PPP investments are estimated to have accounted for a little over 30.0 per cent of total investment in infrastructure in the Eleventh Plan. Their share may have to rise to 50.0 per cent in the Twelfth Plan. Government’s proposal for modification in investment norms for pension and provident funds to channelize their large cash inflows into Infrastructure Debt Funds would also provide infrastructure projects with reliable sources of long term funding. The funding for infrastructure has not been a major constraint thus far and credit to infrastructure has continued to account for almost one third of bank credit to industry. There have, however, been other conspicuous stumbling blocks, viz. delay in policy promulgations, environmental clearances, land acquisitions, permissions, etc. which have contributed to delays and project over-runs. While Central and State Governments would have to deliver on easing these roadblocks and facilitating investments in the infrastructure sector, banks would also need to hone their credit appraisal, monitoring and risk management skills, keeping in view the long gestation period of infrastructure projects. This would ensure that the sector’s funding needs are met, while keeping the position of NPAs under stringent control. Challenges for Banks Need for Enhancing Productivity 16. The performance of banks in 2011 and 2012 have been somewhat muted due to the general slowdown in the economy and the higher interest rate environment. The balance sheet of Scheduled Commercial Banks (SCBs) reflected slower growth at 15.5 percent in 2011-12 as compared to 19.2 percent in 2010-11, with deceleration in credit growth. The increased cost of deposits impacted net profit of banks, which increased at a slower rate of 16.1 percent as compared to 23.2 percent during the previous year. Interest expended on deposits, along with increase in proportion of high cost term deposits, led to acceleration in the interest cost of banks. Net Interest Margins of banks dipped marginally compared to the previous year. An analysis of profitability of banks, however, reveals that profitability of foreign banks is higher than that of other bank groups. Though their share of total assets of the banking system stands around 7 percent, foreign banks account for close to 12 percent of profits of SCBs. A Du Pont analysis showed that foreign banks registered highest Return on Assets amongst bank groups due to better asset utilization, although their operating expenses to assets ratio was higher compared to other bank groups. Their higher profitability could be attributed to better fund management practices. This is an area where Indian banks would need to improve. 17. The profitability of SCBs would be under increased strain during 2012-13 due to higher level of NPAs. The gross NPAs of the banking system has increased from 2.36 percent in March 2011 to 3.25 percent in June 2012. Restructured standard accounts as a percent of gross advances have doubled from 2.7 percent in 2009 to 5.4 percent as at June 2012 with substantial increase in restructuring in certain sectors. Data indicates that restructuring is largely resorted to in case of industrial sector accounts, particularly, large industries, as against smaller borrowal accounts such as agriculture, micro and small enterprises. The persistently high level of NPAs and increase in restructured accounts continues to pose a significant constraint on banks’ abilities to reduce lending rates, thereby, in a sense, penalizing the honest borrowers. Corporates need to innovate and embrace technology to improve their productivity and efficiency so that their costs can come down, they remain competitive and continue to service their obligation as borrowers. Banks on their part must look to arrest the deterioration in asset quality by adopting better risk management practices like better credit appraisal, closer monitoring of borrowal accounts, greater information sharing among banks and by carrying out elaborate viability studies before restructuring. While NPAs/ restructuring of assets cannot be wished away, they need to be effectively curtailed so as to ensure that the lendable resources of banks are maximized. On its part, RBI has mandated banks to put in place an effective mechanism for information sharing by December 2012 and to sanction ad hoc loans/renewal of loans to new or existing borrowers only after obtaining/ sharing the information. Lack of Enabling Environment 18. According to the Doing Business Rankings 2013, India ranks way down at 132 out of 185 countries in the global index of countries in ‘Ease of doing business’; 41 places below China, 51 places below Sri Lanka and 116 places below Taiwan. Explosive growth can only be achieved if there is an enabling economic environment. This requires Governmental policies for quicker clearances, which encourage business and long term investment. Recently, some steps have also been announced to stabilize the Government finances and contain fiscal deficits within manageable levels. 19. Government has also taken steps to encourage public investment as well as public private partnerships in infrastructure and to tap into available technology and capital from around the world. I firmly believe that for achieving explosive growth, it is imperative that macroeconomic environment stabilizes, inflation and inflation expectations come down to comfortable levels and the twin deficits are contained. The steps initiated by the Government need to fructify into effective change. Opportunities Galore Customer Centricity 20. Every challenge is also an opportunity. A Boston Consulting Group study “Indian Banking 2020 - Making the Decade’s Promise Come True” estimates that the income group below the middle class with annual household income of Rs 90000 to Rs 2.00 lakh per annum will constitute the largest group of customers, increasing from an estimated 75 million households in 2010 to 120 million in 2020, constituting the ‘Next Billion’. This customer segment would increasingly demand affordable, low cost banking services. The challenge for banks is to extend the reach of banking services through bank branches/ATMs/BC model to tap the potential of this customer segment. Banks need to develop customer centric products and services. The pricing has to be right and affordable. Greater use of technology, including mobile services, could revolutionize banking. The potential of mobile banking is immense. The BCG study estimates that even if 25–30 percent of mobile users have GPRS / 3G activated, there would be 250 million to 300 million customers who would access banking services over the mobile. The Indian banking industry would have to innovate and build an efficient and low-cost framework for transaction banking. Going forward, customer satisfaction would be the buzzword for success and would set the winners apart from the laggards. Dream Big, Think Small 21. If we are to achieve explosive growth, banks would need to increasingly focus on the SME, agriculture and retail sectors. It is a fact of life that large corporates have easy access to huge loans across the banking sector, but they also account for a major segment of NPA/restructured accounts. On the contrary, the small borrowers/MSMEs continue to face difficulties in accessing bank finance due to perceived higher risk and lower ticket size. It needs to be appreciated in this context that the delinquencies in this segment are largely attributable to the inadequacy of finance and lack of support from the banks to the viable units at an appropriate stage. Banks must realize that through adequate appraisal, fair pricing and by extending proper handholding support to the MSMEs, the sector can be a potential game changer in terms of accretions to the banks’ bottom line. 22. Banks need to evolve business models and delivery channels which would bring down the cost of providing credit to the agriculture/ retail/ SME segments. We can achieve explosive growth if banks are able to customize and deliver cost effective products and services to this customer segment while simultaneously guiding and providing handholding support to these sectors. The fear of increase in NPAs cannot be a ground for depriving these sectors of timely and adequate credit. Besides translating into increased business opportunities for banks, these sectors can significantly contribute to employment generation and growth in savings, and would support GDP growth. 23. There is also a need to encourage incubation and development of new business ideas and providing funds to translate these into reality. Facebook would not have been a reality if angel investors Reid Garrett Hoffman and Peter Thiel had not funded Mark Zuckerberg. According to a BCG India study, India has 190,000 millionaires but only about 500 angel investors. The HNIs in India prefer to invest in real estate. While Venture capital funds, to some extent, do provide funding to start ups, much more needs to be done to develop a viable ecosystem where new ideas with potential for employment and wealth generation can flourish. Banks could consider providing funding to such innovations. Attitudinal Changes 24. Success demands change in the way banks do business, harness the power of innovation, recognize the huge potential at the bottom of the pyramid and reach out to them. Banks need to go the extra mile in financial literacy by educating the customers and understanding the ecosystem in which small businesses and agricultural operations grow and thrive. They need to learn to work in a partnership to finance sustainable business. 25. Success is not about financing seemingly safe large corporates by following the herd in a ‘me too’ manner. It is about changing mindsets, looking at untreaded paths, putting the customer above all and tapping the power of technology. This demands a committed workforce with the requisite technology, HR and risk management skills. It calls for re-skilling the existing workforce and hiring and retaining talent in the public sector, particularly, in view of the large scale retirements over the next few years. PSBs would have to increasingly look at performance management, changing mindsets and empowering employees for fast and effective decision making. It requires a cultural revolution in the banking sector, particularly for public sector banks if they wish to retain the competitive advantage of size over the smaller but more nimble footed private sector/ foreign banks. Regulatory / Supervisory Environment 26. One of the essential pre-requisites for attaining sustained growth is financial stability, which in turn requires a combination of strong regulation and supervision. The regulators and supervisors need to be abreast of the changing contours of the financial system, be aware of the changes in the way banks do business, new products and services, the risks and the mitigants. They need to have their ears to the ground, so to speak, so that they are not caught unawares by the undercurrents in the financial system, which could turn into a financial tsunami. Given the tremendous financial and human cost of the recent sub-prime crisis, we cannot afford a relapse. Hence, the emphasis has to be on developing a strong supervisory infrastructure for creating a robust financial system and an environment conducive to growth. We at the RBI have been looking at the supervisory system and the way we supervise banks. Based on the recommendations of the High Level Steering Committee set up for the purpose, we have initiated the transition from a CAMELS transaction based approach to a Risk based approach in supervision of banks. Based on the interactions that I had as the Chairman of the HLSC and other periodic dialogues that I have with the bank management, my assessment is that most of the banks do not have a clear perception of their activity wise costs and profits. It is, indeed, perplexing how these banks have been managing their risks when they do not have an idea of which activity/business line has a positive risk-reward skew? 27. Against this backdrop, as a first step, we have advised banks to re-assess their risk management architecture, culture, practices and such other related processes and to benchmark them against certain essential requirements which have been identified as prerequisites to introduction of risk based supervision. Banks have also been advised to upgrade their HR capabilities with regard to skill sets required for handling risk management systems, MIS, etc. to facilitate the switch over to risk based supervision. RBI would also conduct training programmes/ workshops for banks once the Risk Profile Templates and guidelines on RBS are finalized. Meanwhile, the challenges for banks would remain in terms of upgrading their MIS capabilities, fine tuning their transfer pricing policies, measuring transaction/ activity wise costing, evaluating the risk-return trade off, putting in place an effective and transparent framework for risk based pricing of products and services and non-discriminatory pricing of liabilities. Conclusion 28. To sum up, let me recapitulate the key ponderables: The first and foremost requirement is to improve the Governance standards in all spheres - at the centre, state, institutions, individuals, etc. Probity in public life and in our dealings are key ingredients that can unshackle the chains that bind us. We need to build public opinion/ awareness about the need for rapid growth as it would prove to be the main driver for the changes that we seek. Agitation is not and cannot be a solution. The banking sector has to develop strong linkages with the real sector in order to ensure stable and sustainable growth. This should govern all aspects of banking operations which would help avoid build up of systemic risk through asset price bubbles. We have recounted some of our inherent strengths earlier. All we need is to refocus on our key strengths and to concentrate our energies on overcoming the bottlenecks currently shackling our growth. Collectively, we need to work hard and improve our productivity and efficiency. There is no reason why we cannot realize our potential of being a high growth economy. As stakeholders, let us strive towards attaining a sustainable high economic growth trajectory and making India a vibrant economy where the gains of inclusive growth disseminate wide and deep and touch all lives, especially those at the bottom of the pyramid. Together we can make this happen. 29. I once again thank ASSOCHAM for inviting me to this Summit and giving me an opportunity to share my thoughts on the theme of the Summit. I note that the technical sessions to follow will be focusing on related sub-themes such as financial inclusion, reforms and the emerging regulatory framework. I am sure that the imperatives of productivity, innovation and reforms, along with the need for linkages between financial sector and real sector, which I alluded to earlier, would find resonance in the session discussions. I hope that today’s deliberations would generate new ideas on how to realize the potential of Indian banking and achieve the explosive growth required to support the needs of the economy, as it seeks to regain its high growth trajectory. Thank you. References Report on Trend and Progress of Banking in India 2011-12 India’s Urban Awakening: Building Inclusive Cities, Sustaining Economic Growth-McKinsey Global Institute April 2010 Doing Business 2013 - IFC & World Bank Report Faster, Sustainable and More Inclusive Growth – An Approach to the Twelfth Five Year Plan (2012-17) Indian Banking 2020 - Making the Decade’s Promise Come True - Boston Consulting Group Business Standard, August 18, 2011- India to be $5.6 trillion economy by 2020: Dun and Bradstreet Business World issue dated Nov 19, 2012- Where are the angels? 1 Keynote Address delivered by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India at the Inaugural Session of the 8th Annual Banking Summit organised by the ASSOCHAM at New Delhi on November 21, 2012. Assistance provided by Smt. Theresa Karunakaran in preparation of this address is gratefully acknowledged.

....G 20 and India....

G 20 and India (46th A.D Shroff Memorial Lecture delivered by Dr. Duvvuri Subbarao, Governor, Reserve Bank of India, at Indian Merchants’ Chamber Mumbai on November 20, 2012)

My sincere thanks to the Forum of Free Enterprise and Shri Minoo Shroff for inviting me to deliver the A.D. Shroff Memorial Lecture. It is an honour to which I attach a lot of value. A.D. Shroff 2. Even as he had no privileged background, A.D. Shroff rose to become one of the country’s most eminent and respected professionals in the financial world of his time. From the Board of Tata Sons, where he was the financial adviser, he went on to become the chairman of New India Assurance and then of Bank of India prior to these institutions being nationalized. At a time when Nehruvian socialist ideology dominated economic thinking, the development paradigm was shaped by the Feldman-Mahalanobis model and the public sector was at the commanding heights of the economy, Shroff had the courage of conviction to argue for an increased role for the private sector in a market economy. It was these intellectual foundations that inspired the Bombay Plan of 1944 of which Shroff was one of the co-authors. 3. The Reserve Bank recognized Shroff’s expertise and innovative thinking early on when, in 1953, it set up a committee under his chairmanship to examine how the flow of finance to the private sector could be enlarged. The Shroff Committee recommendations played a key role in defining the basis for institution building in the financial sector - ICICI and at a later date IDBI, were set up as development financial institutions, a deposit insurance corporation in the shape of DICGC came in the early sixties and the Committee’s suggestion of setting up unit trusts as vehicles to channelize small savings into investments provided the basis for the later day UTI. 4. The Shroff Committee recommendations were seminal and have been acknowledged. Perhaps less known is the fact that A.D. Shroff was the deputy governor that the Reserve Bank never had. Sir Osborne Smith, the first Governor of the Reserve Bank of India (RBI), asked for him as the deputy governor of RBI in 1936 but the proposal was vetoed by the British government which felt that Shroff was too close to the Congress Party. It is ironic that this perceived 'Congress Economist' went on to be regarded as one of the most virulent critics of the Congress Government's economic policies during the second and third plan periods. 5. Clearly a man ahead of his time, A.D. Shroff understood the importance of private investment in nation building in a liberalized, market driven environment. Like every great idea awaiting its time, the liberalization that he so fervently advocated had not fully arrived in the country till the early nineties - a quarter century after he passed away. 6. The economic liberalization that we started in the nineties has meant India integrating with the rest of the world, a process that is still work in progress. Over the last ten years, India’s two way trade flows as a proportion of GDP have doubled; our two way current and capital flows as a proportion of GDP have more than doubled. The experience of the global financial crisis and now the Eurozone crisis has taught us that even as we benefit from integration, because of that very integration, we become vulnerable to global shocks. 7. India’s embrace of globalization and the remarkable transition the economy went through after the economic reforms of the 1990s are an eloquent testimony to eminent thinkers with foresight and conviction like A.D. Shroff. I can think of no better way of honouring the memory of a visionary like him than talking about India’s enlarged stake and growing role in global economic policy making. In particular, I will focus on the G 20 and India’s interests in this very vital international forum. G 20 8. The G 20, as all of you know, has been in the forefront of battling the financial crises - the global financial crisis of 2008/09 and the Eurozone crisis since 2010 - that have taken a devastating toll on global growth and welfare. Indeed when the history of this crisis is written, the London G 20 Summit in April 2009 will be acknowledged as the clear turning point when world leaders showed extraordinary determination and unity. Sure, there were differences, but they were debated and discussed, and compromises were made so as to reach the final goal - of ending the crisis. This resulted in an agreed package of measures having both domestic and international components but all of them to be implemented in coordination, and indeed in synchronization where necessary. The entire range of crisis response measures - accommodative monetary stance, fiscal stimulus, debt and deposit guarantees, capital injection, asset purchases, currency swaps, keeping markets open - all derived in varying degrees from the G 20 package. 9. Five years on the crisis is still with us; only its epicenter and the main actors have changed. During these five years, the world has also become privy to the differences on some vital issues within the G 20 membership. Understandably therefore, there are concerns and apprehensions that the vaunted unity and sense of purpose that the G 20 showed earlier on are dissipating. 10. My own view is that these differences should not be exaggerated. After all, in a world comprising nation states, there is no natural constituency for the global economy. There are bound to be differences when the agenda is so broad and country level compulsions are seen to be clashing with global interests. What is important is that we are able to resolve these differences with the realization that in a globalizing world, no country can be an ‘island’. What happens anywhere affects economies everywhere. Global financial stability is a global public good, and there can be no more an effective forum than the G 20 to steer the world towards globally optimal solutions. 11. Having set that context, I will now address the following questions: What is the G 20 and how does it function? Why is the G 20 important? What have been/are the main issues on the G 20 agenda and India’s concerns regarding them? What are the future challenges for the G 20? What is the G 20? 12. The G 20 is an informal club with 19 member countries and the European Union which together represent 90 per cent of global GDP, 80 per cent of global trade and two-thirds of the global population. 13. Contrary to popular belief, the G 20 is not a new international grouping triggered by the global financial crisis. It was, in fact, triggered by an earlier crisis, the Asian crisis of 1997. Although, it has been meeting regularly since 1997, it acquired a higher profile and credibility in the aftermath of the global financial crisis during which time it was elevated from a Finance Ministers’ forum to a Leaders’ forum. 14. The chair of the G 20 rotates every year from country to country. The chair country takes the lead in formulating and driving the agenda. The G 20 leaders meet at the summit level once a year.2 Besides, the Finance Ministers and central bank governors of G 20 meet twice a year. All the meetings are typically held in, and hosted by, the chair country. The President of the World Bank and the Managing Director of the IMF attend the G 20 meetings, thereby ensuring that the activities of the G 20 are integrated into the agenda of the Bretton Woods Institutions where necessary. There are also other invitees to the G 20 meetings such as the OECD, UNDP and the regional development banks. Why is the G 20 important? 15. The G 20 can be seen as a watermark in international economic diplomacy in at least two ways. 16. First, it is a major step forward from the old divisive style of global governance of the Bretton Woods system characterized by little communication and much acrimony between major developed (G 8) who were largely seen as donors, and developing (G 77) countries that were seen as the recipients of bilateral and multilateral aid. Differences in perception remain, but there is now a paradigm shift in the donor-recipient equation, a better appreciation of each others’ viewpoint, and an emerging consensus on what increasingly appears to be an incipient new international order through G 20 reports and declarations to which both sets of countries are committed. 17. This new style of international governance had been in the making for some time. The bigger EMEs, particularly the BRICS3, were growing at a much faster pace than OECD countries for a long time, and were becoming increasingly systemically important. It became clear that for any multilateral economic consultative process managing globalization to be effective, their inclusion in the process was imperative. Even prior to the global crisis, the G 8 found it expedient to invite the big emerging economies - the G 5 (Brazil, India, China, Mexico and South Africa) - to their Summits as special invitees, but only to select sessions in what was termed the Heligandamm process. The global financial crisis has simply underscored the need to associate major emerging economies in global economic governance. From being the sources of constant instability in the global economy, some of the larger emerging economies are now increasingly seen as nodes of stability and growth. 18. The second factor that makes the G 20 unique is its attempt to coordinate the macroeconomic policies of systemically important economies to make them more effective in a world where national macroeconomic policy instruments are being blunted via rapid global integration through trade and financial markets. Following its concerted and coordinated policy response to the crisis, the G 20 set about the task of addressing reform of the global economic and financial architecture, and to remove long-standing structural impediments to strong, sustainable and balanced global growth going forward by launching its signature ‘mutual assessment process’ which is increasingly seen as the heart and soul of the G 20. The success of this process is important for global financial stability, as I will explain later. Main Issues on the G 20 Agenda 19. In that context of the origins and importance of G 20, let me now turn to some of the main issues on the G 20 agenda after the world surfaced from the depth of the 2008/09 global financial crisis. I will also give the Indian perspective where appropriate. Global Rebalancing 20. The first issue I want to address is global imbalances. Almost everyone is agreed that one of the root causes of the global financial crisis is the buildup of global imbalances. In as much as global imbalances - no matter whether they were caused by a ‘consumption binge’ in advanced economies or a ‘savings glut’ in EMEs - were the root cause of the crisis, reducing imbalances is a necessary condition for restoring global financial stability. 21. The post-crisis debate on global imbalances has three interrelated facets. The first is the role of exchange rates in global rebalancing. The second relates to capital flows into EMEs raising the familiar challenge of managing the impossible trinity. And the third facet is the framework for the adjustment process. Let me turn to these one by one. 22. First, on the role of exchange rates - a prime lever for redressal of external imbalances. Global rebalancing will require deficit economies to save more and consume less. They need to depend for growth more on external demand which calls for a real depreciation of their currencies. The surplus economies will need to mirror these efforts - save less and spend more, and shift from external to domestic demand. They need to let their currencies appreciate. The problem though is that while the adjustment by deficit and surplus economies has to be symmetric, the incentives they face are asymmetric. Managing currency tensions will require a shared understanding on keeping exchange rates aligned to economic fundamentals, and an agreement that currency interventions should be resorted to not as an instrument of trade policy but only to manage disruptions to macroeconomic stability. 23. That takes me to the second facet of global imbalances - capital flows. The problem of capital flows came centre stage in the aftermath of the quantitative easing by advanced economy central banks when the excess liquidity in the global system found its way into faster growing EMEs. The most high profile problems thrown up by capital flows, in excess of a country’s absorptive capacity, are erosion of monetary policy effectiveness, currency appreciation and loss of competitiveness. Speculative capital flows could also lead to asset and commodity bubbles potentially threatening both financial and economic stability. 24. In the G 20 debate on capital flows, popularly but mistakenly referred to as ‘currency wars’, EMEs agitated mainly two points. First, that in as much as lumpy and volatile capital flows are a spillover from the quantitative easing of advanced economies, the burden of adjustment has to be shared. Second, that capital controls should be understood as legitimate and acceptable defence against speculative capital flows.25. Global imbalances and their correction were the main concern in the G20 Framework and Mutual Assessment Process (MAP) exercise. The MAP exercise is aimed at making countries commit to external sector policies that lead to strong, sustained and balanced growth at the global level. The understanding is that global imbalances, especially imbalances built on the strength of undervalued exchange rates accompanied by a build-up of reserves, threaten the stability of the global economy due to the possibility of disorderly unwinding. 26. China’s exchange rate policies were at the centre of the debate in the G 20. As on date, China’s current account surplus (in relation to its GDP) has declined from the pre-crisis peak, and China’s real effective exchange rate has also appreciated since 2005, even though it is widely believed that it needs to appreciate further. In the meanwhile, however, the cumulative surpluses of oil producing countries (mostly OPEC, Russia and Norway) have increased and now account for the lion’s share of global current account surpluses. While global imbalances have declined in the post-crisis period, their nature and composition continue to evolve. It is important that the MAP exercise in the G 20 keeps a watch on changes in the composition, nature and distribution of global imbalances and their implications, and to steer the work towards their underlying causes. 27. Now let me comment briefly on the India perspective on the global imbalance problem. India did not contribute to the generation or transmission of global imbalances. As much as we want to enhance our export competitiveness, we believe that it should come from improved productivity rather than an artificially calibrated exchange rate. Our exchange rate is largely market driven, and we intervene in the forex market only to manage volatility in the rate and to prevent macroeconomic disruptions. As a developing economy, we run a large current account deficit (CAD) that has in recent period expanded relative to our historical record. We need capital flows to finance the CAD. We have an express preference for equity flows over debt flows, for direct investment over portfolio investment and for long term over short term flows and. We are moving gradually towards opening our capital account along a roadmap, the roadmap itself being recalibrated to the evolving global situation. Our policy, in short, isfestina lente which is Latin for ‘make haste slowly’. 28. India co-chairs, along with Canada, the G 20 Framework ‘MAP’ Working Group (FWG). This provides India an opportunity not only to get an early preview of the macro and micro consequences of global initiatives, but also to actively contribute to such initiatives. India’s suggestions on the role infrastructure investment can play in the global recovery and rebalancing is a case in point. As a co-chair, it may be important to ensure that the work of the FWG is not seen as merely a technical exercise but as an effort towards a genuine dialogue on macroeconomic policies of the 20 most significant economies and for engaging in a cooperative game that results in greater policy coordination which is a public good. Global Reserve Currency 29. The global crisis has revived the familiar concerns about the robustness of the international monetary system, and in particular about the global reserve currency and the provision of liquidity in times of stress. The system we now have is that the US dollar is the world’s reserve currency by virtue of the dominant size of the US economy, its share in global trade and the preponderant use of dollar in foreign trade and foreign exchange transactions. And as Barry Eichengreen told us in his book on the story of the dollar4, the reserve currency status depends also on a host of intangible factors such as strategic and military relationships, laws, institutions and incumbency which he referred to as ‘network externalities’. 30. In line with the Triffin paradox, the US has met the obligation of an issuer of reserve currency by running fiscal and external deficits while enjoying the ‘exorbitant privilege’ of not having to make the necessary adjustment to bridge the deficits. With no pressure to reduce the deficit, a dominant economy can potentially create imbalances at the global level as indeed happened in the build up to the crisis. An argument can be made that even in the context of a single reserve currency, global imbalances are not inevitable. The US could not have run persistent deficits had not the EMEs provided the demand side impetus by accumulating reserve assets either for trade advantage or as a measure of self-insurance against external shocks. 31. The problem with the world having only a single reserve currency came to the fore during the crisis as many countries faced dollar liquidity problems as a consequence of swift deleveraging by foreign creditors and foreign investors. Paradoxically, even as the US economy was in a downturn, and its central bank resorted to extraordinary quantitative easing, the dollar strengthened as a result of flight to safety. 32. Based on the experience of the crisis, several reform proposals have been put forward to address the problems arising from a single reserve currency. One is to have a menu of alternative reserve currencies. But this cannot happen by fiat. To be a serious contender as an alternative, a currency has to fulfill some exacting criteria. It has to be fully convertible and its exchange rate should be determined by market fundamentals; it should acquire a significant share in world trade; the currency issuing country should have liquid, open and large financial markets and also the policy credibility to inspire the confidence of potential investors. In short, the ‘exorbitant privilege’ of a reserve currency comes with an ‘exorbitant responsibility’. 33. A second solution to the single reserve currency issue is to develop the SDR as a reserve currency. This does not seem to be a feasible option. For the SDR to be an effective reserve currency, it has to fulfil several conditions: the SDR has to be accepted as a liability of the IMF, it has to be automatically acceptable as a medium of payment in cross-border transactions; it should be freely tradeable and its price has to be determined by forces of demand and supply. 34. Another option, a third possible solution, is to expand the SDR basket by including the currencies of countries that are increasingly important economically and politically. With the increasing economic weight of emerging markets, it seems inconceivable that emerging markets will not want to see their currencies play a greater role in international transactions. Recent initiatives by some EMEs, especially China and Russia, aim at facilitating international use of their currencies. The exclusion of emerging markets currencies makes emerging markets bystanders of the system rather than stakeholders. Integration of emerging markets into the international monetary system could increase their incentives to gear their policy conduct towards contributing to the stability of the system. However, the pros and cons of this alternative have yet to be fully studied. In particular, we have to reckon with the question of whether emerging market currencies, not being fully convertible, can meet the demanding criteria required for inclusion in the SDR. 35. The fourth option is not actually an alternative, but is in part a solution. It aims at reducing the need for self-insurance and thereby the dependence on a reserve currency by supporting a multilateral option of a prearranged line of credit that can be easily and quickly accessed. The IMF has designed some line of credit specifically with this objective in view. 36. None of the above solutions fully addresses the problems arising from a single global reserve currency. What this underscores is that at the global level we need to explore these and other options for protecting ourselves from the vulnerabilities that we confront as a consequence of a single reserve currency. 37. India’s own position on the global reserve currency is that the world will be better served by increasing the number of reserve currencies, but this has to happen in an organic way, not by fiat. Meanwhile countries need safety-nets to protect themselves against the vulnerabilities of the global currency system. Also, the US has the responsibility of ensuring that every country has access to dollar liquidity, especially in times of stress. 38. According to this view, countries cannot be asked to desist from building up reserves and depend entirely on external safety-nets. Foreign exchange reserves should invariably form the first line of defence. On top of that, they need currency swap arrangements. In fact, the US obligation, by virtue of its status as the issuer of the global reserve currency, to provide dollar swap facilities to all large economies, including India, is one of the issues that we discussed in the Ministerial Level Indo-US Dialogue last month. Protectionism 39. In the post-crisis world, there may not actually be ‘deglobalization’ but the earlier orthodoxy that globalization is an unmixed blessing is being increasingly challenged. The rationale behind globalization was, and hopefully is, that even as advanced countries may see some low end jobs being outsourced, they will still benefit from globalization because for every low end job gone, another high end job - that is more skill intensive, more productive - will be created. If this does not happen rapidly enough or visibly enough, protectionist pressures will arise, and rapidly become vociferous and politically compelling. 40. 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. 41. Following the global financial crisis, the G 20 leaders were determined not to repeat the mistakes of the 1930s when the brunt of protectionism exacerbated the Great Depression. However, there is concern in some quarters that even as open protectionism has been resisted relatively well during the current crisis, opaque protectionism has been on the rise. Opaque protectionism takes the form of resorting to measures such as anti-dumping actions, safeguards, preferential treatment of domestic firms in bailout packages and discriminatory procurement practices. To strengthen multilateral trade discipline, the need for a quick conclusion of the Doha Round can hardly be overemphasized. In a world with growing worries about the debt creating stimulus packages, a Doha Round agreement should be welcomed as a non-debt creating stimulus to the global economy. 42. India opposes protectionism in all its forms. However, at the same time, we have to respect the WTO-consistent policy space available to the developing countries to pursue their legitimate objectives of growth, development and stability. We are encouraged by the analysis of the recent trade monitoring report jointly released by WTO, OECD and UNCTAD on G 20 economies which shows that majority of the trade measures taken by India in the review period were either trade facilitative or roll back measures. IMF Quota and Governance 43. The global economic and financial crisis of 2008 exposed critical weaknesses in the structure of the International Financial Architecture as well as in its governance. The G 20 has been trying to address these governance and structural weaknesses while at the same time endeavouring to stabilize the global economy through a process of mutual consultations and policy co-operation. An important motivation for these reforms is that the global economy has undergone fundamental changes in the past decade and a half and these changes have not been reflected appropriately in the International Financial Architecture. 44. While agreement has been reached in the G 20 for effecting major reforms, implementation has so far has been disappointing. The agreement for IMF quota and governance reforms in 2010 has not yet been implemented. India’s major concern is that we should adhere to the timeline for completing the IMF Quota reforms by January 2013, so that it serves as the basis for the 15th General Review of Quotas to be completed no later than January 2014. 45. There has been some criticism that IMF quota and governance issues should be settled within the IMF management and not at the G 20. The dominant view though has been that the G 20 should continue to be the main forum for overall guidance not only on the direction that the comprehensive review of the formula should take but on continued reform of the International Financial Architecture, as it may be difficult to reform this from the inside in view of its flawed and outmoded shareholding structure. The G 20 has played a crucial role in steering discussions on the quota formula in the past and it will be unfortunate if this aspect is diluted going forward. 46. Global institutions can only be legitimate and credible if their vote share and governance structure reflect members’ share in the world economy. It is in this context that India and other emerging countries believe that GDP should have predominant weight in the quota formula as it is the most robust measure of relative economic weights in the global economy. Financial Sector Reforms 47. Received wisdom today is that financial deregulation shares the honours with global imbalances as being one of the twin villains of the crisis. Not surprisingly therefore, reforms to the financial sector regulation have been on top of the G 20 agenda. 48. The broad contours of the international initiatives spearhead by the G 20 on financial sector reform rest on four broad pillars: regulation, supervision, resolution, especially in respect of global systemically important financial institutions (or SIFIs), and assessment of the implementation of new standards. So far, one pillar that has received substantial public attention is regulatory reform, where there have already been some notable achievements, including agreement on the new Basel III capital and liquidity standards. 49. However, the process of regulatory reforms that is proceeding across various jurisdictions has come to pose new challenges especially as the global economy continues to be marked by new risks. The uncertain and uneven recovery has led to calls in some quarters to dilute or slow the financial reform initiatives. While there may be a case for some back loading of difficult adjustments to strengthen the recovery of the financial sector, any weakness in our resolve or commitment to reform will sow the seeds for a fresh crisis down the line. The key task is therefore to fully implement what has been agreed in a cooperative manner. 50. All G 20 members have committed to the implementation of the Basel III package. However, major jurisdictions have come out with their own regulatory standards. It is important that there is no disharmony that could be confusing. We need to guard against the possibility of regulatory arbitrage. If comparable standards are not implemented in all jurisdictions simultaneously, financial activity will likely migrate to less regulated jurisdictions as well as into shadow banking with disruptive consequences for the entire global financial system. 51. As we move forward in the area of regulation, the investment needs of the emerging market and developing economies also deserve special attention. There are two important points in this regard. First, it is important to ensure that financial intermediaries in emerging and developing economies are not disadvantaged in the new regulatory framework, especially since the opportunities and challenges in their systems are quite different. 52. Second, the more demanding regulatory standards should not lead to deleveraging by global financial institutions out of emerging markets. It should be noted in this regard that the financial regulatory reform has so far focused on reducing systemic risks, and rightly so, but not much attention has been devoted to redirecting savings from investment in volatile financial assets to financing investment in the real economy, where the impact on growth and jobs is more tangible and direct. We need to recognize that it is income from the real sector that must ultimately pay for the profits of the financial sector. Standards setting bodies should design incentives in a manner that helps redirect global savings into investment in the real economy, particularly in infrastructure, supports demand and enhances long-term potential growth thereby fulfilling the original role of intermediating for growth and development of the real economy. 53. Collaboration between financial authorities on these issues is an important, albeit a difficult and painstaking task. Collaboration becomes difficult especially when it entails profound structural changes in the face of volatile financial markets and anemic growth. Yet, it is precisely these challenges that make it so vital that the regulatory response in the G 20 should be well coordinated internationally to ensure that the new regulatory framework is effective and globally implemented and the follies of the past that led to the financial crisis are not repeated. Future Challenges for the G 20 54. I have so far discussed some of the major items on the agenda of the G 20. Let me now look ahead to the challenges that confront the G 20 on the way forward. 55. The first challenge is drawing a balance between short term compulsions and medium term sustainability. A case in point is the intense debate in the advanced economies on fiscal austerity vs growth. Everyone is agreed that long term fiscal consolidation is critical to macroeconomic sustainability. At the same time, everyone is also aware of the pains of fiscal adjustment in the short-term. If fiscal profligacy is seen as consumption of future income and shifting the burden to a future generation, fiscal austerity should be seen as the price for the necessary correction so that burden sharing across generations is fair and optimal. If the compulsions of short-term and long-term policies point in different directions, how can these be harmonized, especially since the long-term is a stringing together of the short-terms? How can G 20 commitments and the ‘Mutual Assessment Process’ (MAP) commitments and assessments accommodate such dynamic policy shifts? 56. The second challenge for the G 20 is to nudge countries’ policies in mutually agreed directions and hold sovereigns accountable for commitments given, especially since these are not legally binding and there is no enforcement mechanism. This is particularly difficult in vigorous democracies where the popular perception could be that national interests are being compromised for the sake of global stability. How can national leaders build and nurture, within their national boundaries, a constituency for the global optimal? 57. Seeking firm, forward looking commitments, or pointed criticism of policy frameworks of other countries, on the lines of the European Union, or even the OECD, style of functioning, may be difficult and divisive at this stage. A more ambitious style of global governance would understandably take some time to take shape. At this stage the issue really is monitoring and assessing whether the general direction of G 20 member country policies is heading in a mutually consistent and agreed fashion over the medium to long-term, and how the G 20 processes can help countries navigate their domestic legislative, regulatory and judicial processes such that commonly agreed policies are adopted. 58. The third challenge for the G 20 is that the success of domestic policy actions in an increasingly globalizing world with growing policy and market spillovers is linked to global outcomes. If rebalancing is uncoordinated, the outcomes could be even worse. Policy co-operation is therefore potentially win-win, since economic integration has moved far ahead of political integration. While this is most clearly manifest in the case of the euro zone, to a great extent, the challenges ahead before the G 20 may be similar. In this sense, the G 20 can be seen as a brave new experiment to push the boundaries of globalization to harvest this cooperation dividend. Summary and conclusion 59. Let me now conclude. I began with explaining the importance of G 20 and how it acquitted itself quite credibly in managing the global financial crisis. I have also dealt with some criticism of the G 20 for its seeming failure to address post crisis issues with the same alacrity and unity of purpose. I then went on to address some of the major items on the G 20 agenda, and where appropriate, indicated the Indian position on these issues. Finally, I listed the three big challenges on the way forward for the G 20 experiment. 60. The G 20 is by all accounts a bold initiative. It is unique from earlier international initiatives in the sense that it is not formed by a charter, has no mandate for global governance and its decisions are not legally binding and enforceable. In short it is based on the realization that in a globalizing world, our futures are all tied together and the only way we can all prosper is though policy cooperation and on the belief that the only way global governance can be pursued is through an honour code. 61. Can the G 20 survive? What would the late Shri Shroff have said? Pragmatist that he was, he would have said that the only way the G 20 can survive is by showing exemplary leadership in resolving our most pressing challenges at the global level. 2 During the crisis, the Leaders met twice a year. Now, the frequency has reverted to the standard pattern of once a year. Post-crisis, seven Leaders' Summits have been held: Washington (November 2008), London (March 2009), Pittsburgh (October 2009), Toronto (June 2010), Seoul (November 2010), Cannes (November 2011) and Los Cabos (June 2012). 3 Brazil, Russia, India, China and South Africa comprise the BRICS. 4 Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System by Barry Eichengreen.

....MONEY....

Government securities with terms of more than one year are called:

  1.capital bills.

  2.bills of exchange.

  3.Treasury bills.

  4.government bonds.

Money is:

  1.the value of all coins and currency in circulation at any time.

  2.anything that is generally accepted as a medium of exchange.

  3.the same as income.

  4.all of the above.

An item designated as money that is intrinsically worthless is:

  1.fiat money.

  2.commodity money.

  3.precious metals.

  4.barter items.

Money that a government has required to be accepted in settlement of debts is:

  1.legal tender.

  2.barter money.

  3.commodity money.

  4.currency value.

 

Which of the following is included in broad money, but not included in narrow money?

  1.Automatic-transfer savings accounts.

  2.Travellers checks.

  3.Currency held outside banks.

  4.Savings accounts

 

A checking deposit in a bank is considered __________ of that bank.

  1.a liability

  2.an asset

  3.net worth

  4.capital

 

Which of the following activities is one of the responsibilities of the Bank of England to the banking system?

  1.Loaning money to other countries that are friendly to the UK.

  2.Auditing the various agencies and departments of the government.

  3.Issuing new bonds to finance the PSBR.

  4.Assisting banks that are in a difficult financial position.

 

The difference between a bank's actual reserves and its required reserves is its:

  1.net worth.

  2.profit margin.

  3.required reserve ratio.

  4.excess reserves.

 

As the required reserve ratio is decreased, the money multiplier:

  1.increases.

  2.decreases.

  3.remains the same, as long as banks hold no excess reserves.

  4.could either increase or decrease.

 

A bank has excess reserves to lend but is unable to find anyone to borrow the money. This will __________ the size of the money multiplier.

  1.double

  2.reduce

  3.increase

  4.have no effect on

 

Assume that commercial banks are holding excess reserves because business firms and consumers are not willing to borrow money. A decrease in the 

discount rate is likely to:

1.increase the money supply because it is now cheaper for banks to borrow from the central bank

2.decrease the money supply because it will now be more expensive for business firms and consumers to borrow money.

3.not change the money supply because banks already have excess reserves they cannot lend.

4.decrease the money supply because it is now cheaper for banks to borrow from the central bank instead of buying government securities.

 

If the quantity of money demanded exceeds the quantity of money supplied, then the interest rate will:

  1.rise.

  2.fall.

  3.remain constant.

  4.change in an uncertain direction.

 

When economists speak of the 'demand for money', which of the following questions are they asking?

  1.How much cash do you wish you could have?

  2.How much wealth would you like?

  3.How much income would you like to earn?

  4.What proportion of your financial assets do you want to hold in non-interest bearing forms?

 

Which of the following events will lead to an increase in the demand for money?

  1.An increase in the interest rate.

  2.An increase in the level of aggregate output.

  3.An increase in the supply of money.

  4.A decrease in the price level.

 

Which of the following events will lead to a decrease in the equilibrium interest rate?

  1.An increase in the discount rate.

  2.A sale of government securities by the central bank

  3.A decrease in the price level.

  4.An increase in the level of aggregate output.

 

The main reason that people hold money - 'to buy things' - is referred to as the:

  1.precautionary motive.

  2.profit motive.

  3.transactions motive.

  4.speculation motive.

 

The motive for holding money that encourages investors to hold bonds when interest rates are low, with the hope of selling them when interest rates 

are high, is the:

  1.speculation motive.

  2.precautionary motive.

  3.profit motive.

  4.transactions motive.

 

The opportunity cost of holding money is determined by:

  1.the discount rate.

  2.the level of aggregate output.

  3.the inflation rate.

  4.the interest rate.

 

The demand for money represents the idea that there is:

  1.a negative relationship between the interest rate and the quantity of money demanded.

  2.a positive relationship between the interest rate and the quantity of money demanded.

  3.a negative relationship between the level of aggregate output and the quantity of money demanded.

  4.a negative relationship between the price level and the quantity of money demanded.

 

In terms of the demand for money, the interest rate represents:

  1.the return on money that is saved for the future.

  2.the price of borrowing money.

  3.the opportunity cost of holding money.

  4.the rate at which current consumption can be exchanged for future consumption.