Globalisation in the Indian Context
While there has been a significant progress towards globalisation in the recent past and policy-wise, there have been impressive initiatives, the extent to which India is globalised is considerably at the lower end of the emerging economies. This indicates enormous opportunities but also challenges in terms of transition from a stage of low base. More importantly, the issue of financial integration and in particular the integration of banking sector has to be considered in terms of overall sequencing in this process of integration with the rest of the world. The overriding issue is not whether to globalise or not, but how best to manage the process of globalization, particularly with a view to accelerating the process at the current juncture where the global outlook on India and India’s confidence as well as competitiveness are strong.
There is now a consensus among academicians and policy makers that trade liberalization should take precedence over financial liberalisation. Even in the context of financial liberalisation, the liberalisation in regard to borrowings in foreign currency should have a lower priority compared to all other capital flows. There is also consensus that the foreign currency exposures of households, corporate sectors and financial intermediaries should be assessed separately and in a continuous fashion to assess the gains as well as the vulnerabilities to the system. In particular, there is a greater recognition of the need to put in place appropriate prudential regulation in regard to the financial intermediaries insofar as foreign currency transactions are concerned in all emerging countries. There is virtual unanimity that the currency mismatches of financial intermediaries is a major source of downside risks of financial integration which can be mitigated by monitoring and regulations. Among the financial intermediaries, banks no doubt have a unique place. There is also a strong consensus, globally, on the importance of what have been described as preconditions for capital account convertibility – in particular on the fiscal front and efficiency of the financial sector.
In the context of maximising benefits of financial integration and minimising the risks, the link with conditions in the real sector cannot be lost sight of. In China, reforms in real sector preceded reforms in the financial sector and it was possibly the reason for some vulnerability of the latter. In India, reforms in financial sector started early in the reform cycle which imparts significant efficiency, and stability to the financial sector. The financial sector can add competitive strength and growth if reforms in the financial and real sectors keep apace. In other words, flexibility in product and factor markets play a part not only in capturing the gains from financial sector reform but also more generally from globalisation. A major agenda for reform at this juncture for us, given the impressive all-round confidence in the economy, relate to the structure and functioning of institutions and in particular the high transaction costs prevalent in our systems. There are several dimensions to the transaction costs – ranging from legal provisions, judicial system, procedures, etc. to attitudes. It is proposed to mention a few measures being contemplated by RBI in this direction.
[Extract from the Inaugural Address by Dr.Y.V.Reddy Governor, Reserve Bank of India at Twenty-Fifth Bank Economists’ Conference (BECON- 2003) on 11th December, 2003]