"The outlook for industrial growth continues to be uncertain, the current inflation rate is a matter of concern, and the external environment is also highly unfavourable," states Jalan. But he has not addressed any of these problems in the mid-year review. He mentions that a case could be made out for monetary tightening through an increase in interest rates or the CRR. Jalan, however, rebuts this in the same breath, pointing out that the growth of bank credit to the commercial sector has not been the primary cause of monetary expansion. He points out that theindustrial slowdown still persists; and nothing should be done to dampen emerging signs of incipient recovery in the real sector. The Reserve Bank governor has also made it clear that he will not hesitate to use short-term instruments like changes in interest rates and CRR when required. The message is clear: The situation is not as good as it should be, but, government willing, it can be brought under control.

Jalan has, however, let loose Big-Bang banking reform, raising capital adequacy of banks, widening their asset-risk recognition menu, and stipulating provisioning requirements. The mitigating element of this package is that commercial banks will have to alter their risk-averse strategy of shying away from lending to the commercial sector and putting their funds in government securities and government guaranteed projects. Income recognition and provisioning now cover government guaranteed advances, investment in government securities, defaulting advances guaranteed by government, and so forth. Bankscannot just garner deposits and funnel them into so-called risk-free assets. They will have to operate a risk management system, become commercial and fully market-oriented; and monitor large loans and take timely action.

On the flip-side, Big Bang asset recognition and provisioning will push up NPAs and squeeze bank profits. Banks will consequently tend to raise interest rates. Is this the right time for Big Bang reform? Jalan himself says that the best hope is that GDP will grow by 6 per cent this year. (Growth is more likely to be close to last year's 5.1 per cent). The trouble is that banking reform cannot wait for uncertain economic revival. However, by pushing banks into catharsis, investment will weaken even further. Could not reform have been phased? The answer is `no'. Banking accounts and policies cannot be jolted every six months or so. Big Bang is unavoidable. Jalan has boldly decided to draw upon the lessons of Japan and South East Asia. As he puts it, "While a persistent and unexpecteddownturn in the real economy creates difficult problems for the financial sector, a fragile financial sector can deepen the real economy crisis and impose heavy social costs." The perception abroad is that India's financial system keeps its weaknesses under the wraps. Jalan has accepted this criticism and decided to go in for international best practices. It would be wrong to make out that the plight of the tigers has panicked the Reserve Bank. Jalan is preparing India for an economic upturn; shaping up the banks to cope with high growth and shun speculative lending.