India vulnerable to oil price, capital flows shocks: YV Reddy

Recent developments in China, Iran and the Middle East have the potential to generate two types of shocks — oil price and capital flows — and India is vulnerable to both, according to YV Reddy, former RBI Governor.

Reddy said: “there is a bipolar world with the US and China leading each block. The difference between old and new bi-polar world is that China and America have close economic integration. This complicates the fight for supremacy.”

Speaking at The Leadership Conclave hosted by The Institute for Advanced Studies in Complex Choices, in association with XLRI, Jamshedpur, on The Growth Paradox: Resolution through Changes in Frames for Choice, Reddy said there are people who believe in three possible outcomes. First, good sense prevails and multi-lateralism will be re-established. Second, Thucydides phenomenon will assert itself, namely, war. The technological developments will result in global giants who may provide an alternative world that would influence or overtake the existing political world.

Roles of states, market

The relative roles of state and market are being redefined with state asserting itself over the markets. The faith in the market has been shaken. The confidence in liberalism has been undermined. The authoritarian leadership is getting increasingly popular, Reddy said.

The relationship between finance and real economy is undergoing changes. The simplistic belief that finance can lead real economy is questioned. The role of central banks is being redefined. Further, the interface between fiscal and monetary management is also in a state of confusion.

The balance between national and global is shifting in favour of nationalism. The national governments are trying to claw their policy space, particularly in the area of fiscal and finance, to be able to assume the risks as the ultimate risk bearer.

Finally, the balance between individuals and the community is getting complicated since the interaction between the individuals seem to be less personalised and more through technology. The human elements in the communities and relationship between the governments and the communities are getting weaker, he said.

Dealing with a number of subjects, including emerging challenges, Reddy said, “I have become more humble than ever before in understanding the immediate future.”

He said India is increasingly influenced by the global developments and India also contributes to global developments more than in the past. In a way, all choices should be seen in the global context also.

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