Speeches / Statements

Address by EAM at Inauguration of 4th International Convention of ANMI

17/01/2009

(ANMI: Association of National Exchanges Members of India)

(17th January, 2009: 1310 hrs, Kolkata)
Shri Bijay Murmuria, President of ANMI
Shri E.M.C. Pallaniappan, Alternate President of ANMI
Shri Rakesh Somani, Chairman, Convention Committee, ANMI
Distinguished participants

Ladies and gentlemen

I am thankful to the Association of National Exchanges Members of India [ANMI] for giving me the privilege to address the inaugural of the 4th International Convention in Kolkata. Being surrounded by so many distinguished personalities representing the Indian and international capital markets, brings back to me old memories of my days as the Union Minister of Finance in the early 80’s.

Friends, a market economy is driven by our ability to innovate, produce ever efficiently, generate effective demand and be overseen by a fair and transparent financial and economic regulatory environment. Capital markets are uniquely placed in this arrangement. They are not only a source of investment funds but also accentuate profit aspirations and incentivise further growth. Fair market practices and a transparent but comprehensive regulatory mechanism in turn will determine the effectiveness of a capital market in an economy. I believe that Indian capital markets have imbibed this principle.

I am happy to interact with you today. Your Association is a pan India organisation and provides your members a regular platform for interaction and interface with the Ministry of Finance, Securities Exchange Board of India (SEBI) and both the exchanges pertaining to capital markets. I expect your interaction to be productive. We are in the middle of a deep global financial and economic crisis which had its origin in the world’s leading economy in the developed world. India, like the rest of the world, is also affected by the slowdown. Your insights into this unprecedented economic meltdown and your policy recommendations to secure and regain the pace of our economic growth would be most useful.

Rhetorically described as the outcome of greed of the Wall Street banker, the causes of this current, unprecedented, crisis are more deep rooted. Former Federal Reserve Chairman Alan Greenspan recently said that he was “in a state of shocked disbelief” and that there was “a flaw in the model” which had been used for the last 50 years. Reckless deregulation of the US capital markets in the 90’s, led to a prolonged US housing boom encouraged by ‘sub-prime’ lending, weak regulation and poor risk assessment creating the largest ever asset and credit bubble which lead to the current crisis. This house of financial cards started collapsing from summer of 2007 when a growing number of US and European banks began to announce huge losses. With the US Federal Reserve-backed take over of Bear Sterns in March, 2008, the dykes broke and the global financial crisis hit all of us. In the last six months, the IMF has revised downwards its forecast of global economy four times.

The Managing Director of IMF described three core failures as components of the international financial crisis: (i) a regulatory and supervisory failure in major developed countries, (ii) failure of risk management in the private financial institutions and (iii) failure in market discipline mechanism. The crisis management, by the international community, would involve liquidity management by Central Banks and loan guarantees by Government and dealing with solvency and bank runs issues. This needs to be followed by a longer term structural reform of the workings of the global financial system, something like Bretton Woods II. At the institutional level, it will be necessary to focus on improving incentive structures through regulation and self-regulation, improved competition, and better governance, education and taxation structures to avoid periodic asset bubbles, excess leverage and gross policy and corporate governance failures.

The G20 Declaration of Heads of State and Government includes a blue print about the future reform of international financial markets. This covers both strengthening of the financial market and the regulatory regimes. Although, regulation is the responsibility of national agencies, intensified international cooperation amongst regulators and the strengthening of international standards, along with their consistent implementation are envisaged as a protection against adverse cross-border, regional and global developments.

As the Prime Minister said, in his intervention at the G 20 Summit in Washington in November, 2008, the emerging market countries were not the cause of this crisis but they are amongst its worst affected victims. A slowing down of growth in developing countries will push millions of people back into poverty with adverse effects on nutrition, health and education levels – impacts that will affect a whole generation.

At the international level, there is - now though belated - consensus that a global financial stimulus is necessary to address what is, essentially, a global crisis; not only is there the need for a coordinated fiscal stimulus amongst countries, it is also important that special efforts need to be made to counter the shrinkage of capital flows to developing countries as well as to take recourse to innovative steps like swap arrangements.

Distinguished Participants,

Although Indian economy is, quite considerably, internally driven, the impact of the global financial crisis on India has been inescapable. Since January, 2008, the stock market has been on a deep downward slide. Commodity price shock, from March 2008, led to surge in inflation and credit tightening and high subsidies. Although, fortunately, there has been little direct impact on Indian banking system, there has been massive liquidity squeeze from September, 2008, because of FII and other outflows, drying up of foreign trade credit as well as of the drying up of the Indian overseas bank branches and of Indian companies foreign acquisitions’ finance.

The Union Government’s response to the impact on India of the global economic downturn has been swift and, as recent developments indicate, beneficial; however, the situation needs careful watch because the current global crisis is nowhere nearing its end. The massive injection of liquidity by RBI, special measures to improve the liquidity of mutual funds and non-banking finance companies, moderation of exchange rate depreciation through substantial sales of RBI’s forex reserves, record increase in Central Government expenditure amounting to nearly 4.5% of GDP and relaxation of prudential norms to assist real estate and housing are some of the measures that I can list straight away.

Friends, you would recall that, the total market capitalisation on the Indian stock market as a proportion of GDP was 13% in 1991 rising from a mere 5% in 1980. Today, as a proportion of GDP, total market capitalisation is more than other large emerging markets like China and Brazil. We can be justifiably proud of our securities market which is well regulated and is consistent with the best international standards prescribed by the International Organisation of Securities Commission. The nature of the current capital markets’ crisis and recent unfortunate developments like the Satyam affair, however, underline the necessity for further reform and pointed attention to issues of global corporate governance. The Government on its part is paying utmost attention to further improving the overall efficiency of the securities market, as well as addressing weaknesses in financial reporting and accounting standards.

The Satyam scam has undoubtedly impacted our securities market, but we need to remember that this is only an isolated case. We will draw our lessons from this and move on. One single event of corporate failure is not a true reflection of Indian economy which is robust and is one of the world’s safest markets.

There are other bigger long-term challenges that also require our prioritised attention. Our efforts to ensure inclusive growth to cover all sections of our society, especially the disadvantaged ones, need to be re-doubled through targeted policy interventions. Whilst we need to constantly work to revive investment mood through economic reforms, we need to guard against excess liquidity expansion and excess fiscal deficits and also to prepare ourselves for slower economic growth rates for the next 2-3 years. Another challenge requiring a resolute response from us is that of terrorism which we witnessed in Mumbai a few weeks back. This brings to the fore the designs of our enemies who are jealous of the progress that India has achieved – the fact that Mumbai has emerged as a major international centre for capital and commerce. The pattern of the terrorist attacks that India has been subjected to in recent times demonstrates the efforts to, somehow, reverse the process of our emergence as a major international economy. We will, of course, foil such designs as we have done, several times, in the past.

As I stated in the beginning, your meeting today could not have come at a more opportune time. The timeliness of this Conference will ensure that your deliberations and conclusions will have an audience larger than the professional gathering here.

I wish you all success in your deliberations.

Thank you.