First, the structural shift in the domestic economy to higher growth. Second, the lagged supply response. Third, the supply shock of oil followed by another of primary commodities, influencing inflation expectations. Fourth, managing the consequences of the global excess liquidity, global imbalances, and the sudden re-pricing of risks in the international financial markets. Fifth, the potential for excess volatility in the cross-border capital flows. These challenges are managed involving several trade-offs, said Reddy at the 18th Annual Forum The Outlook for Financial Markets, for their Governance, and for Finance convened by Ambrosetti, The European House, at Villa dEste in Cernobbio, Italy. While pre-commitment to a set of reforms is useful, some flexibility in policies may be needed to respond to ongoing developments. Such flexibility in reviewing, rationalising and constantly rebalancing the pace and sequencing of various measures impacting the financial markets is considered desirable and the financial markets are generally kept informed of these developments.
In fact, there are grounds for the financial markets to be comfortable with such flexibilities in policy measures that add to the overall financial stability, he said. According to Reddy there were, undoubtedly, many challenges for the Indian economy, but it was useful to focus on a few of these: the usual suspects. First, the poor state of the physical infrastructure, both in terms of quantity and quality, was considered to be most critical hindrance for Indias progress by many. The most important issue here was regulatory framework and overall investment climate, which were being addressed by the government.
Secondly, fiscal consolidation still remained a matter of concern, especially in the eyes of the rating agencies. Third, and perhaps the most challenging issue related to the development of agriculture.
While over 60% of the workforce is dependent on agriculture, the GDP growth generated from agriculture was only marginally above the rate of growth of the population, which is not adequate to ensure rapid poverty reduction. Fourth, delivery of essential public services such as education and health to large parts of the population is a major institutional challenge.