Statement by the Honorable C. Rangarajan Governor, Reserve Bank of India Leader of Indian Delegation Annual Meetings, Hong Kong

1. The Annual Meetings of the World Bank Group and the International Monetary Fund at Hong Kong, China are of historic significane, coming as they do immediately after the unification of Hong Kong with China. In many ways Hong Kong epitomizes the tremendous potential for economic development through openness to foreign trade and investment within a framework of a sound regulatory environment. Hong Kong has a fairly large community of Indian origin which has contributed to Hong Kong's development for more than a century, and I am sure it will continue to do so in future. We thank the Chinese authorities for the excellent arrangements and warm hospitality.

2. World growth has continued to be strong, thanks in part to the high growth of developing countries and the prolonged boom of the US economy. Inflation has also remained low. However, there are some reasons for concern. World trade growth decelerated significantly in 1996, with sharp slowdown in export growth in many Asian countries. The medium-term outlook for developing country growth is less buoyant than in the spring of this year. There is, therefore, a need for concerted policy action to reverse any incipient sign of deceleration of growth in these countries. In this context, it is essential to encourage rapid recovery through strengthening of an open, non-discriminatory multilateral trading system operating within the WTO framework. Along with free trade and buoyant private capital flows, there is a need to augment flows of ODA, which remain crucial for the development of poorer countries with limited access to private capital markets.

3. The crisis in some East Asian currencies has been an important feature of the global economy in the recent months. Led by the IMF, the swift action on the part of the international community in putting together a rescue package has helped to reduce the costs of the crisis and contain the spill-over effects on other countries. It is clear from these developments that there can be no substitute for prudent macroeconomic policies, effective economic reforms and strong domestic financial systems to facilitate growth with price stability and orderly external payments conditions. It is essentially through such a strategy that countries can avoid currency crisis and also lay the foundation for a rapid and sustained development that is necessary for raising general living standards and alleviating poverty.

4. The accelerating pace of globalization and integration of markets requires strengthening of institutions, both at the national and international levels. At the international level, policy coordination is needed to strengthen economic linkages. Multilateral institutions must help promote an environment that is conducive to world-wide prosperity. These institutions, therefore, need to be strengthened, with decision making in these isntitutions being made more transparent and democratic. The conclusion of the Eleventh General Review of Quotas has given the Fund extra strength, although regrettably the voting share of developing countries has declined in the process. There is a clear need to review the formulate for quota calculations before the next Quota Review so that the fast growing developing economies get their due share. The one-time special allocation of SDRs is a reflection of international goodwill, since it will help these members which could not participate in previous allocations while at the same time ensuring some allocation to every country.

5. We fully support the proposal to infuse capital into MIGA through subscription by member countries. On the HIPC and ESAF initiatives, my Government has already agreed to contribute its entire balances in SCA-2 as a non-interest bearing deposit towards funding these arrangements. These initiatives of multilateral institutions need to be supplemented by further measures to ensure that the transfer of resources to developing countries is maintained at an appropriate level. In particular, there is an urgent need to review the interntional commitment to IDA.

6. Infrastructure development is the key to rapid economic growth in developing countries and we are very happy that the Bank Group is charting an active role for itself in promoting private investment in infrastructure. We strongly support this initiative.

7. India is the largest functioning democracy in the world all the attributes of a free society, ensuring that good governance is in place. The Government of India is fully committed to deal with the menace of corruption which is reflected in the statements of the Prime Minister of India made in various fora.

8. Let me take this opportunity to apprise this distinguished gathering of the recent developments in the Indian economy. We are indeed happy that our structural programme of economic reforms and commitment to macroeconomic stability continue to yield substantial rewards. In 1996/97, the Indian economy grew by 6.8 per cent. Growth has averaged 7 per cent in the last three years. Inflation has been brought under control and is currently at around an annual rate of 4 per cent. The Central Government's fiscal deficit declined to 5 per cent of GDP in 1996/97 and is budgeted at 4.5 per cent for 1997/98. The external sector has remained strong with the current account deficit at one per cent of GDP in 1996/97 and is expected to be around 1.5 per cent in 1997/98. The debt service ratio is projected to decline substantially from 25.4 per cent in 1996/97 to about 21 per cent in 1997/98. Foreign currency reserves (excluding gold and SDRs) increased by $5 billion in 1996/97 and by a further $4 billion in the first five months of 1997/98. These reserves stood at $25.5 billion as of mid September. Foreign investment rose to nearly $6 billion in 1996/97 and is expected to be substantially higher in the current fiscal year, 1997/98. All in all, the economic fundamentals are strong.

9. We are already conscious that to maintain and improve on a strong economic record, we have to deepen economic reforms and conduct vigilant economic management. Our reforms have accorded special attention to the financial sector. Our banking prudential standards have been strengthened to be comparable to the international ones. We use both on-site and off-site supervision of banks. Government securities market has been widened, with introduction of new instruments with an array of maturities and are sold on an auction basis. Stock market reforms have been pursued vigorously. Monetary policy has been made more flexible, with virtual deregulation of interest rates, and sharp reduction of reserve requirements. The exchange rate is market-determined. Restrictions on the current account of balance of payments have been eliminated. We are exploring possibilities of liberlization of capital account. An expert committee recently submitted a report providing a road map on capital account convertibility. This is under examination by the central bank and the Government of India.

10. Let met not give the impression that we do not face any policy challenges. Very recently, we have had to deal with the problem of coping with a large wage settlement for government employees. In order to contain the fiscal deficit at the budgeted level, the Government has acted pormptly to raise fresh taxes, cut expenditure and expand the programme of disinvestment of government owned enterprises. We have also had to tackle the problem of large capital inflows in the context of monetary and exchange rate management. Our experience shows that monetary and financial policies geared to maintain a resonable degree of price stability can serve the purpose of not only maintaining a stable domestic environment, but also avoid the need for disruptive exchange rate adjustment.

11. We are aware that we still have to tackle the problem of poverty. We are however confident that with an external environment that is conducive, the Indian economy will be able to realize a sustained growth of over 7 per cent per year which, besides enhancing living standards in general, will directly reduce poverty and provide resources for expanding programmes of social development.