Why India’s policies continue to be of the 10%, by the 10% and for the 10%?

Dr YV Reddy revisits the 25 years of reforms.

He usually has the most meaningful things to say. Unlike other such interviews who glorify the whole thinking behind 1991, his view is far more nuanced.

He says we suffer from this tyranny of 10%. On reading just the headline, one thought he referring to our obsession with 10% growth. But what he means is how policy space is being cornered by the 10%:

What is still to be opened up after 25 years?

There is an impression that economic reform means opening up. In fact, in my view, there is an issue of the tyranny of the 10% in our policy focus. What I mean is that 10% of our investment is funded by foreign savings and the attention paid to that in our policy debate is 90%. When the discussion is on the work force, it is focused on the organised work force, which is less than 10%. Similarly, the large private corporate sector dominates policy discussions disproportionate to its criticality to our economy.

Opening up is one element of the financial sector reform. Financial sector reform is one element of economic reform, the real issue for us is one of efficient financial intermediation in our economy. We have to improve financial intermediation in banking, which dominates the financial sector. As long as there is no genuine reform in public sector banking, financial intermediation will continue to be inefficient.

Now, when it comes to capital markets, they are essentially being driven by foreign investors reflecting more of inherent volatile global conditions than relatively more stable domestic growth. My position on Participatory Notes being an unhealthy element in the Indian financial sector is well known. In India, households still depend on banks. The capital markets are yet to command the trust and confidence of households. In my view, the mutual fund business is being driven by bank money and institutional sources. Mutual funds should ideally not have the participation of anything other than household money. And they should not be a pass-through vehicle for corporates and institutions who have the capacity to take independent financial decisions unlike households.

In brief, the real immediate priority for reform of our financial sector is to improve the efficiency of the the domestic banking system and to enhance the integrity and relevance of the capital markets to Indian households.

It is all about policies of, by and for finocracy! It is amazing how so much of our economic agenda is being driven by them. There was a time when Indian central bank stayed away from this discourse but last few months has made it a leader of the pack.

He also discusses how he went against the grain in 2006-08:

What was the biggest challenge you faced then or later in your various roles?

The biggest challenge for me professionally was to manage a situation of plenty as governor of the Reserve Bank, especially during the 2006-08 period. We in India have never had to deal with a problem of plenty in the past. Global liquidity was high during this period. The belief, including among the political leadership, was in favour of global finance. The belief was also in favour of finance leading to development and being of great benefit to all. The risks of global finance were being underestimated then. Therefore, we had to convince everyone about the challenges involved in development of the financial sector and integration with the global economy. RBI as a professional body commanded respect globally and was able to gain the trust of the government.

The combination of intellectual opinion, especially from the IMF, interests of global financial conglomerates and the inclination of the political leadership in favour of the prevailing beliefs had to be countered with all professional resources in RBI and the personal trust reposed in me. However, the government and the RBI still worked together to bring about significant legislative changes and a structural transformation while undertaking counter cyclical operations. The outcomes in terms of GDP growth, inflation and the soundness of the financial sector and the strength of the external sector reflect the co-ordinated policies during this period. They show that the challenge has been met successfully by all of us.


Though, none of the pressures have abated. IMF and global financial conglomerates continue to make the same noises. The change is they are now welcomed with all hands. There is no counter happening anymore.

There was something else in these people. The kind of importance they laid on institutions and team-work was seen across our institutions. Now it has just become a game of personalities  – I, me and myself…

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