Dr Subbarao started his talk by quoting K R Narayanan commenting that globalisation was not the end of history. He then pointed out that the latest Global Financial Crisis (GFC) was truly global. He humorously pointed out his term as reserve bank governor started just before the GFC, so some blamed him for it. India had a well regulated financial sector but was still hit by the GFC. India had a drop in the Indian Rupee, with overseas investments leaving. Local companies withdrew funds from the local money market, causing a shortage of capital. The RBI reacted by ensuring local liquidity, foreign exchange liquidity and credit flow to "productive" sectors. As a result the economy recovered quickly, but there is inflation the RBI is addressing with interest rate increases. Dr Subbarao commented that it did not so much matter what the RBI did during the GFC, as long as it was seen to be doing something. It was also more important to manage the end of the GFC measures, than their introduction.
Dr Subbarao's Lessons from the GFC:
- In a globalizing world, decoupling does not work. As an example of this, under conventional economic theory, house prices are a purely local issue, but a collapse in house prices in the USA caused the GFC.
- Global imbalances need to be redressed for the sake of global stability. The GFC was caused by global imbalances, with surpluses in China and Asia and deficits in the USA.
- Global problems require global coordination.
Dr Subbarao suggested that the level of agreement by countries during the GFC could not be expected into the future. But global imbalances remain and require coordination.
- Price Stability and Macroeconomic Stability do not guarantee Financial Stability.
- Micro-prudential supervision is necessary, but not sufficient. Needs to be supplemented by macro-prudential oversight.
- Capital controls are not only unavoidable, but advisable in certain circumstances. Dr Subbara's law of capital flows is: "You never get capital flows at the level and time you want".
- Economics is not physics. Dr Subbara pointed out that the GFC was predicted, but its exact manifestation was not.
- Having a sense of economic history is important to prevent and resolve financial crisis.
Dr Subbarao has earlier been Secretary to the Prime Minister's Economic Advisory Council (2005-2007), lead economist in the World Bank (1999-2004), Finance Secretary to the Government of Andhra Pradesh (1993-98) and Joint Secretary in the Department of Economic Affairs, Ministry of Finance, Government of India (1988-1993).
Dr Subbarao has wide experience in public finance. In the World Bank, he worked on issues of public finance in countries of Africa and East Asia. He managed a flagship study on decentralisation across major countries of East Asia including China, Indonesia, Vietnam, Philippines and Cambodia. Dr Subbarao was also involved in initiation of fiscal reforms at the state level and has written extensively on issues in public finance, decentralisation and political economy of reforms.Dr D. Subbarao will present the 2011 K R Narayanan Oration - ‘India and the global financial crisis – what have we learnt?’. He is the 22nd Governor of the Reserve Bank of India. Prior to this appointment, Dr Subbarao was the Finance Secretary in the Ministry of Finance, Government of India.