## Saturday, August 30, 2008

### Global Turbulence: Its Unfolding Trajectory and the Likely Implications for India

A lecture by Percy S. Mistry at ASCI, Hyderabad, on 26 August 2008.

## Introduction

Since mid-2007, the global economy has been unravelling in disconcerting fashion. That has taken governments and aam aadmi' by surprise in most countries. The nature and speed of this unravelling' has been discomfiting. It affects everyone: i.e. individuals, poor, middle-income, or rich, multinational and domestic firms, academics, governments or regulators.

Global turbulence is certainly affecting India. We can see that in sudden changes in our inflation rate, growth rate, exchange rate, and in our capital markets. We can see it in the stresses and strains it is putting on fiscal, monetary and social policy. But, by and large, the impact of global ructions has so far been less on India than on other energy importing countries. The continental dimensions of the Indian domestic market are now generating a powerful internal growth dynamic with rising domestic incomes. That provides India with some shelter from this global storm.

Energy exporters are, of course, booming. They cannot absorb the huge surge of funds that are flooding into their small economies. Energy exporters in the Middle East have built up incremental reserves of over \$3 trillion in just the last five years. This huge imbalance in global financial flows and in rapidly accumulating financial stocks represents both a cost and an opportunity for India. But we risk exacerbating the cost and blowing the opportunity.

India is not as dependent as China is on the US and EU for manufactured exports. But that gives us little comfort. Our service exports are facing headwinds. Remittances may fall if the US and EU go into recession. But that may be offset by remittances from Gulf countries. Yet, paradoxically, India will weather this storm with less damage than the US, EU or Japan; and most developing or transition countries.

That is not just because of the size of its growing domestic market but because its trade, finance, industrial and agriculture sectors are not yet as integrated into the global economy as those of many other countries that are globally less significant than India has become. Some of us may take comfort from that and argue that we should insulate ourselves even more. But there are downsides to being insulated; especially for a country that has benefited so much from globalisation. That phenomenon has opened our access to labour and service export markets; which in turn India has done much to develop.

In any event, regardless of what is happening in the world, we are building up many problems of our own by default. We do not seem to have either the political consensus or the administrative capacity to address simultaneously that large number of urgent issues that confront us.

Our deficit on merchandise trade is approaching 10% of GDP. Despite export income from services and remittances we now have a current account deficit of 2.5 to 3% of GDP. We have a real' fiscal deficit approaching if not exceeding 10% of GDP taking all off-budget items into account. These are not good signs; especially in an external environment that is not benign. But I'll come to that later.

We now have significantly lower growth than we thought we would -- from 9% to 7%. It is a reflection of how far we have come in the last five years that not just government and industry, but even aam aadmi, is now concerned about GDP growth falling to 7%. We face much greater economic and financial uncertainty. Our stock markets have lost 40% of their value in just six months. No one knows when we will get back to January 2008 levels.

Our inflation rate seems to have gone from 5% to 12.5% almost overnight! That seems to have come upon us suddenly and caught us all by surprise. We seem to be in denial about the extent to which our growth rate might be hit in the next 18 months. The ugly reality is that we are now being hit by three or four combined largely exogenous shockwaves of varying intensity and amplitude.

## Four Globally Generated Shockwaves

1. The Financial Shock triggering a Global Slowdown
2. The Oil & Commodity (including Food) Price Shocks that have exacerbated the financial shock
3. The Resulting Inflation Shock
4. The Coming Stagflation Shock

The first phenomenon of concern is the systemic global financial shock triggered by the sub-prime crisis in the US a year ago. It spread instantly to Europe. It has since affected parts of the world more integrated than we are with the American financial system. These include places like Latin America and East Asia; especially in Korea, Japan, Taiwan, Hong Kong and Singapore. It has certainly affected China and, to a lesser extent, India as well.

What was a financial dislocation in the US is now slowly but surely making itself felt as a shockwave spreading through the global economy. In the US and EU a severe credit squeeze is on as banks and NBFC's retrench to stem mark-to-market' value losses, despite a stance of relative monetary laxity on the part of central banks to revive growth. Small and medium sized firms that had committed credit lines are finding those suddenly closed. Banks are reducing their exposure not just to SMEs but to home financing, credit card and other consumer credit risk; e.g. for purchases of consumer durables and cars. Personal loans that were being marketed through the post have become extinct. NPA's and loan defaults are rising even as net credit extension is contracting. And this is happening despite monetary policy in the developed world being quite loose, while inflation is escalating. We run the risk that such an accommodating monetary stance, if prolonged in a vain attempt to revive growth, may cause global inflation to ignite and go out of control; reaching levels last seen in the late 1970s and early 1980s. It took a decade and a very tight monetary squeeze to wring inflation out and get growth going again.

What started in the US and EU, is now becoming a global credit squeeze as the largest and most influential global banks, as well as their smaller counterparts, focus on repairing broken balance sheets rather than on expanding global business. Their focus is firmly on improving credit quality. They are all slashing back on credit quantity. That could result in the financial shock translating itself into a real economy, output shock. In turn that may turn into an unemployment and income reduction shock.

When such a downward spiral starts it is difficult to arrest and reverse; especially if fiscal deficits are already too high and room for manoeuvre for fiscal or monetary stimulation is limited. Unfortunately, that is precisely the situation that most countries, including India, are now in. There are very few countries running fiscal surpluses or deficits so low that they can afford classic Keynesian stimulus. These are energy exporters or countries like China and Singapore.

The kind of credit squeeze we are now facing cannot be relieved by monetary accommodation alone. Pushing on a loose string does not get you very far. It needs more than that. Most of all it needs time to permit necessary adjustments of gross macro-imbalances in savings, investment and consumption to occur. But we do not know how much time that will take. Global policy stance is aimed at delaying those adjustments. That uncertainty threatens to prolong global misery and delay global recovery. It is now abundantly clear that all the talk about coupling or decoupling, and being insulated from global forces, is fundamentally oxymoronic. We are in a globalised world where we sink or swim together. Some countries may do better than others. Some may drown. But we are all getting wet.

The second shockwave is the oil price and related wider commodity price shock. It has been building up gradually for some time. But it gathered real force last year. Many people think it has peaked. I am not so sure. A variety of arguments have been trotted out ad nauseam to explain what happened and why; although I must confess that few really seem to understand what did happen. I certainly don't.

Financial speculation has been blamed for oil prices overshooting. But the evidence on that is mixed. In the kind of financial world we now live in, it is becoming almost impossible to tell the difference between: (a) the amount of liquidity that is needed from financial operators to keep commodity markets functioning smoothly under conditions of stress, and (b) the excess liquidity pumped into markets to influence short term prices that can legitimately be called speculation. Providers of market liquidity can often overshoot or undershoot in their own price expectations of what the future may hold. They adjust their positions in physical and derivative markets daily as new information emerges. That is NOT speculation. It is how the oil market works. Price discovery must respond to new information and changed expectations continuously if markets are to function. Nevertheless, the recent sharp fall in oil prices does support the view that speculative heat in the oil market may have gotten out of hand.

The third shock, resulting from the first two, is the more generalised inflation shock that is now running rampant through the world economy. What was obscured during the halcyon years was the extent to which China was absorbing global inflation in its quest to become the world's workshop. For the sake of market share, and to accumulate forex reserves, China sacrificed the interests, wages and living standards of its manufacturing workers. Their lives and living standards have improved dramatically within a generation. But that improvement has not occurred as fast as it should have, had global currency markets been better understood by China and been allowed to work properly.

To be ultra-competitive China kept wages and its exchange rate artificially low for too long. In doing so it transferred real income from Chinese manufacturing workers to global consumers. That approach -- sustained for 15 years -- prevented global adjustment from occurring as smoothly and as early as it should have. Global currency markets were not permitted to work in ironing out imbalances in global trade, current and capital accounts, in reserves, and the global circulation of investment and savings.

The artificial suppression of the CNY, for what the Chinese authorities defended as legitimate domestic reasons, delayed necessary global adjustment. It has now made the size of the adjustment that is needed now, much worse. In retrospect, it clearly made the world's central banks much too complacent about the global inflation shock that they would eventually have to cope with, once China's ability to absorb it came to an end. Since inflation was not showing up in their domestic consumer price indices -- although it was showing up in almost all asset prices -- they seemed to think they had conquered it decisively.

There is a lesson in that for India. We seem to have convinced ourselves, like the Chinese, that capital account opening and market determination of exchange rates to permit market equilibration of traded prices would be bad for us; that it would destroy our competitiveness and destabilise our financial system. I firmly believe that exactly the opposite is the case. If our competitiveness depends solely on the exchange rate then we are not really competitive at all. Our financial system would be stronger with more competition, innovation and openness. But it would need structural change. Moreover we need to make Indian producers and service providers more responsive to global price changes in all the big prices (whether for energy, money, etc.) without providing too many shock absorbers of the kind that in turn cripple our macro-economy.

The fourth shock, yet to be felt with full force, is the coming stagflation shock. That will occur as the combined impact of the first three shocks feeds more fully into the global economy and lowers output growth, but with prices remaining higher than they should. How long will that last? No one knows. While history invariably repeats itself, it never does so in exactly the same way. So while we may think we know the broad contours of what might happen, and what the consequences may be, we have no idea of exactly how things will unfold or evolve.

Eventually commodity prices, then wholesale producer prices, and last, consumer prices, will moderate with falling global demand. But the large remaining structural demand-supply imbalances in oil, gas and energy production, food production, metal/mineral production, that have become so evident over the last three years, will not disappear overnight. The investments now being made in expanding supply will not come on stream overnight. With continued growth in India, China and Asia even the supply responses that are presently on stream may not be enough to moderate prices to the extent we would like. With the oil price declining then rising again in the last two weeks (while the dollar has moved in the opposite direction) some pundits seem to think the worst is over. But is it? No one really knows.

Suddenly, our expectations about future global and Indian growth are lower. Our levels of uncertainty about the future are higher. Until yesterday we were convinced, along with China, that we would be masters of the 21st century universe in two decades. Now we are not so sure. Some of us are behaving as if we have gone from heroes to zeroes almost overnight.

This abrupt reversal has been particularly unpleasant and confidence-shaking. That is because we are realising in retrospect just how benign the previous period of nearly 15 years has been. We have had relatively high growth and low inflation in India and in the global economy since 1993 with a few blips in between. Of course all has not been sunny and bright everywhere. Let me explain to draw the backdrop of what may lie in store for India if lessons learnt elsewhere apply.

Since 1992, a country as large and significant for the global economy as Japan -- which we forget still accounts for over 10% of the global economy -- has been in a state of stagnation/deflation with dreadful demographics and legacy pension and healthcare liabilities that are staggering in size; along with a level of public debt that makes Italy look responsible. The UK and the EU were in virtual recession during the early 1990s but emerged from that to a prolonged period of low but positive growth between 1995 and 2007. Latin America has been recovering. But Africa has remained its non-performing self; except for a brief respite due to exploding commodity prices. Africa has been unable to capitalise on its mineral and natural wealth. Eastern and Central Europe have been doing well since coming out of the shadows of being Soviet satellites. The US, China and India have been doing well since 1993.

Since 1993 though we have had a number of local financial and economic crises; with disturbances like the Mexico crisis of 1994-95, the Asian crisis of 1997-99, financial crises in Russia, Turkey, Ecuador, Argentina, and so on. In that period we have seen the dot-com bubble burst in 2000, followed by the globalisation of terrorism since 9/11/2001. That has had a profound effect on the psyches of governments around the world; but most particularly in the US which has developed symptoms of acute paranoia, reflected in an embedded siege mentality. But despite these local and regional shocks, the global economy has prospered averaging a growth rate of nearly 5% with low inflation for 15 years.

Now the legacy of those 15 years of growth is at risk. We are caught, like rabbits in headlights, wondering what has happened, as well as why and how. Were our achievements so fragile and illusory that they could now be so imperilled? Were we building our houses, dreams and expectations on unrealistic foundations of sand? Are we now coping with entirely different realities that have come to the fore? When is the unravelling of value going to stop?

In India we tend to be a bit volatile in our reactions when things do not turn out as we expect or project in a state of euphoria. Our post-independence experience suggests that we are naturally inclined to pursue a national strategy that amounts to meddle-and-muddle, but stay in the middle'. But our media and public commentators are given to extremes of hyperbole. One minute we are in the clouds and nothing can stop us. The next minute we are underground and nothing can save us. The truth as always lies in between. We are neither heroes nor zeroes. We are just typical Indians.

## A Fifth -- Geo-Political -- Shockwave

I could go into much more detail about the four shocks that the world and India now face. But I will not do that. Reams have been written in India and around the world about all of them. Much of what has been written is suspect. But that is beside the point. I do not want to take up more time on the detailed nature of these shocks. What I would like to do instead is focus on another profound transition -- a fifth geopolitical shockwave if you will -- that is rapidly unfolding and that we are in the midst of feeling the effects of, without quite realising it or preparing ourselves properly to deal with it.

The last decade of the 20th century and the first decade of the 21st are registering significant subterranean movements in the geopolitical tectonic plates that support the world economy and determine the global balance of power. The centre of global economic gravity is shifting decisively away from the West to the East. In the next three decades, bilateral Indo-Chinese and Indo-Asean trade, indeed intra-Asian trade, will resemble the pattern of trans-Atlantic trade growth between the US and Europe, and then trans-Pacific trade growth between the US, Japan and East Asia through the first and second halves of the 20th century. The 21st century will see trans-Indian Ocean and trans-Himalayan trade grow in a similar way.

As the centre of global economic gravity shifts so will flows of trade, finance and investment as well as global movements of high and low-value labour. So will the weight of global consumption. For too long the world has bestowed on America the dubious honour of being the world's consumer of last resort. In the process, the world has also unwittingly made China the world's producer of first resort. In part that unintended consequence, and dysfunctional tendency, lies at the root of the economic problems that the world now faces. In order to fuel American consumption well beyond reasonable levels, the world in general, and China as well as energy exporters in particular, have provided the US with credit in its own currency that is now looking increasingly poor in quality.

The world has permitted America to borrow egregiously and excessively in its own currency without the kind of surveillance by the IMF and OECD that other countries are subjected to. And that has been grossly overdone. A major adjustment is now clearly needed in global consumption, savings and investment patterns. America needs to consume less, reduce its borrowing dramatically, and stop printing excess money to support its addiction to excess consumption. It needs to invest far more to replace its crumbling infrastructure and restore its manufacturing and service efficiency.

To an extent the same applies to Europe, although it does not exhibit the same egregious imbalances as the US; although the UK is heading in the same direction. What Europe has to accept is that its welfare state model is reaching the end of its sell-by date. It generates too many perverse social incentives with the state trying to mitigate all the risks that individuals must be allowed to bear some responsibility for. It is compromising on excellence, efficiency and effectiveness with an assertion of equality' in a state-driven way that will ensure that true equality always remains elusive. In the process, public services are absorbing so large a proportion of the total economy that old Europe is becoming structurally uncompetitive. New Europe provides the only hope for dynamism in the European economy.

In Asia adjustment has to be of an opposite nature. China, in particular, must learn from the experience of Japan. It has to start consuming much more domestically and increasing imports rapidly, while saving, investing and exporting slightly less. China also has to move toward spreading markets throughout its entire economy rather than letting markets operate only in its export driven manufacturing sector. It has to open its capital account, let its currency float, and resolve the major problems its financial system confronts. It would be nice if China spent less on its military build-up (because it faces no real external threats) and switched such spending to domestic private consumption. Eventually China must face up to the contradiction between a market economy and an authoritarian polity that no longer believes in communism or socialism; but believes only in retaining the absolute power of the communist party. A free market in a free economy will eventually demand a free political system. Obdurate official opposition to that reality on the part of the Chinese authorities will only make China and the world a less safe place until reality asserts itself, which it inevitably and inexorably must.

For all this to happen, the geographic pattern of savings mobilisation and circulation will change dramatically. South and East Asia will become larger players in global finance than the US and Europe. Those changes will bring about profound changes in perceptions of global security needs and raise questions about who polices the world, what our stake is in ensuring that it is policed well, and how. The days of US hegemony in that domain are coming to an end. Those who wished for that outcome may suddenly find themselves regretting its premature arrival! We are simply unprepared for it.

Who or what replaces the US as the world's hegemon is unclear. China is making no secret of its ambitions to fill the vacuum that the US leaves. The rest of the world is making no secret of its concerns about that. That has profound implications for India, which are not being discussed at all; or certainly not being discussed openly. Even now the Indian Ocean is in danger of becoming Chinese as the China-Africa trade and investment axis grows at a pace that India hardly realises or is keeping pace with. It will soon be crowded with Chinese merchant ships and fishing fleets demanding protection by the Chinese navy.

So the fifth geopolitical shock that is unfolding slowly but building up in force has even greater implications for India that what is happening at present in the global economy.

## The Implications of these Five Shockwaves for India

What are these implications? To me the answer is obvious. To others it is fanciful. To many wise commentators in government, the media and politics, the answer seems to be to become more introspective and protectionist; i.e. to hunker down, strengthen our protective fortifications and our policy umbrellas, and put on three or four more raincoats to protect ourselves from the global storm raging around us. My own feeling is that such an approach may stop us from getting wetter than we otherwise might. But it will also stop us from continuing along the path of progress and poverty alleviation through rapid growth that we have now irrevocably committed ourselves to.

The most obvious implications are for India to pursue second generation reforms aggressively on a number of fronts: i.e.:

1. The Economic Front
2. The Political Front
3. The Judicial Front
4. The Social Front

While I cannot on this occasion go into the depth I would like in all these four areas I will sketch out my glimpse of what we need to do to cope.

First, India must unleash a second round of deep and wide reforms in its economy beginning with its financial system, then its labour market, and spreading to its agricultural and urban economy. We have made progress in transforming productive competitiveness. We have done so by unshackling our private sector, and by improving the technological prowess and market reach of our industrial and services economy. But we still have far to go in becoming globally competitive across the board. We have failed so far to tackle our urgent labour market problems and financial system reforms that would make our real economy even more dynamic, more flexible and responsive to global market changes, and much more globally competitive. We are falling too far behind in addressing critical reforms in making overdue policy changes and much larger public and private investments in rural development and agriculture. While we have talked about them ad nauseam our infrastructure constraints are growing more acute by the day. We are simply failing to cope with very rapid rates of urbanisation resulting from accelerated rural-urban migration; and in our approach to avoiding future environmental and ecological damage.

To be fair one could at a stretch say that some reforms in these areas have begun. But they are barely discernible to the naked eye. We need to: (i) move more swiftly and boldly toward an open capital account and toward a much freer financial system that develops bond, currency and derivatives markets more swiftly and is regulated quite differently; (ii) focus RBI's attentions exclusively on monetary policy and inflation control and divest it of the responsibility for doing anything else; (iii) repair immediately our large and growing fiscal deficit, along with the size of rapidly burgeoning public debt, by divesting state-owned banks, companies and other assets -- we need to do this on financial and efficiency grounds and not on ideological grounds.

We need to move (iv) from an addiction to price subsidies to the provision of targeted income subsidies that are aimed at alleviating poverty rather than at destroying proper market functioning; and (v) more swiftly on creating essential infrastructure by replacing our endless talk with decisive action if we wish to prevent total gridlock in our economy. On the human capital front we need to (vi) privatise our academic establishments and upgrade dramatically our deteriorating capacity to develop human capital in all its diversity as rapidly as we need. It is not enough to have twenty islands of educational excellence in an ocean of mediocrity. Finally we need to (vii) universalise healthcare rapidly but learn carefully from the lessons of others and learn what we must try and avoid. We must not create the NHS that Britain is so proud of but that is totally dysfunctional in addressing genuine healthcare needs efficiently and cost-effectively.

In addition to all that we need badly to revamp our parliamentary and judicial systems so that they strengthen the processes of democracy rather than weaken and compromise them as well as compromising the integrity of the Indian state in that process. We desperately need a polity that is less fractured, fragmented and so devoid of principles, faith, belief, or economic and social philosophy, that blocks of votes and seats are available to the highest bidder to achieve any expedient, episodic outcome. I could do a lecture on each of those areas. But, this is neither the time, nor the place for that. Last year, P.C. Alexander made an excellent speech at ASCI on precisely this issue. Bimal Jalan has written about it openly as has Arun Shourie and other luminaries in Indian public life. Yet writing is not enough

It is not only our polity whose structure, process and behaviour that imperils development, growth and democracy in India. Our judiciary, legal system and our society as a whole are equally to blame. Perhaps the roots of the problems lie in the way our lawyers are trained. But the entire judiciary and legal system now seems preoccupied with technicalities, endless (but lucrative for lawyers) delays in the court proceedings, and an obsession with undue' process at the expense of swift conflict resolution, substance and justice. Corruption has spread through the judicial system like rampant cancer. Yet the judiciary considers itself immune from public scrutiny, transparency or accountability. It refuses to employ management practices that would make the legal system more efficient, less time-consuming and less crippling in its cost for the average person to have recourse to. The same is true of our law enforcement agencies. They stand by and permit mayhem rather than acting decisively and forcefully to prevent it. They act only after irreparable damage is done and then in a reticent manner. They are quick to oppress the poor and indulge in daily petty corruption that is the bane of life in India.

Yet, at the end of the day, who is to blame for the continual erosion that has occurred so relentlessly in the authority, credibility, legitimacy and probity of our great institutions: i.e. the presidency, parliament, government, law enforcement and the judiciary? Ultimately we, as thinking Indians, have to blame ourselves for treating our precious democratic legacy and heritage so lightly. We concede too readily our political space to be dominated by the incompetent, the irrational, the prejudiced, the blindly traditional, the power-hungry, venal, corrupt and vainglorious. It is not public service that motivates candidates for election anymore. It is purely the pursuit of power for its own sake and material self-interest. Our anti-corruption laws are so ineffectual that they have become a standing joke. The way in which they are applied is even more hilarious. With a few notable exceptions, most of our politicians at national and state level are a source of acute embarrassment for India rather than of pride.

And still, the growing middle class in India cannot be bothered to turn out and vote. Nor does it voluntarily create public service NGOs that monitor and scrutinise the day-to-day behaviour of our elected and appointed officials. So it abdicates political space to the deprived and disempowered who vote quite rationally in the interests of what they believe at election time will be their own betterment; seduced every five years by grand rhetoric and false promises never delivered. Of course their betterment never results; because they vote for people they think are so representative of themselves but in reality lack their basic ethics and decency; i.e. they vote for those that are relatively uneducated, those to whom reason and rationality has not even passing familiarity, those who believe that their role as elected representatives is solely to push for the interests of their castes, tribes and co-linguals and subordinate entirely the wider interests of India as a nation, and those who believe that winning elections is the best short cut to the accumulation of personal wealth. One could of course go on endlessly in this vein, as many have. But it is counterproductive. Bemoaning our plight does not get us anywhere. Doing something about it might. And the great Indian middle class now needs to make itself felt forcefully in acting -- through voting and monitoring -- to raise standards in Indian public life.

Second, to cope with the geopolitical realities of tomorrow, India must develop and project a much clearer vision and strategy about what role it is going to play in the world as one of its two most populous countries representing a sixth of humanity; and one of its four largest economic blocs along with the US, the EU and China. With great power status -- which we will have to cope with, even if we do not want it -- will come even greater responsibility. We need to be able to handle it well.

We cannot sleepwalk or sweet-talk our way into the future on an issue by issue basis; which is the impression we seem to giving to the world now. It is profoundly disturbing that most countries in the world treat India and China so differently in their dealings with them. They treat China with deference and respect tinged with fear. They treat India with diffidence and occasional disdain, if with a great deal of affection tinged with a sense that India is just too undisciplined, and too diffuse, difficult, disorganised and distracted' to ever get its act together. China is seen by the world and treated by it as a majestic tiger; India is more like a Labrador intent more on scratching its itches than on going anywhere.

## Conclusions

I have spoken for too long. So let me summarise: To withstand this and other global shocks, to keep output growing at rates of above 8% annually, so that we can remove poverty even if it is through the bootstrap effect of increasing the size of our middle class relentlessly, and to ensure that India enters the world with confidence not diffidence, we need second generation reforms in spreading the benefits of market functioning throughout our economy. But that is not enough.

We also need to decide more clearly what role the state should play in our economy and our society. It is patently obvious that sarkar can no longer be maa and baap to everyone. It cannot own and operate commercial assets allegedly in the public interest. Experience suggests that the public interest is not served by the state doing so. Instead it is compromised. Our previous policies have kept India impoverished and only post 1992 reforms that had their roots in 1984 have changed that trajectory.

What government needs to do is govern and regulate properly, to ensure law and order, provide for personal and national security, enforce and respect property rights, and promote our economic and strategic interests in the world. It does not need to do what the private sector can do better. By doing what government should not be doing, it is not doing well what it should be doing; i.e. governing. We need to rethink our approach and strategy to facilitate the emergence of India as a major economic and strategic player on the global stage. And we need to improve our regulatory capacity across the board to make India more efficient, effective, competitive, dynamic and innovative in all that we do.

We must realise that our growth is being affected not just by what is happening in the world. It is also being affected by a dramatic slowdown in our own reform momentum. We cannot live off the fruits of post-1992 reforms forever. Their benefits are now embedded. At the margin they will yield less and less. Their incremental gains are gradually tapering off.

To keep our growth rate at 8% or more we need to move further and faster with reforms not just in our economy but in our society, our political system and judiciary. Events in J&K remind us that we are at increasing risk of losing control over the centrifugal and centripetal political forces that are continually bearing down upon us. We should not permit the celebration of our diversity and our multi-ethnicity, which we seem to revel in as a sub-continent, to damage our integrity, sovereignty, unity and sense of purpose as a nation.

I could say a lot more but I have already said enough with deliberate provocative intent. I would be happy to listen to your reactions and answer your questions.