Growth beyond 7-7.5% likely to stoke inflation: YV Reddy

Jan 31 2013, 03:58 IST
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SummaryRBI governor too recently spoke about India’s lower growth potential.

Former Reserve Bank of India (RBI) governor YV Reddy has said that at the present level of structural reforms, India\'s potential growth rate, or the rate at which the GDP can grow without fanning inflation, is 7-7.5% against about 9% assessed before the global crisis, agreeing with the view expressed by incumbent governor D Subbarao some months back.

In an interview with FE editor MK Venu for Rajya Sabha TV, Reddy – who has recently been designated chairman of the 14th Finance Commission – added that the new normal for global growth may be less than the pre-crisis period’s 3.5%, which was found unsustainable.

Reddy\'s remarks are a sign of the growing realisation among India\'s policymakers that the economy\'s productive capacity at this stage is somewhat strained, an opinion some independent economists had expressed earlier. In July last year, Subbarao has said that India\'s post-crisis potential growth rate might have fallen to around 7.5%, down from the 8% estimated previously. The GDP growth rate had fallen to 6.5% last fiscal from 8.4% in the year before. The growth was a lower-than-expected 5.3% in the September quarter of this fiscal, which saw a 10-year-low growth in public consumption, and a dismal 5.5% in the previous quarter. The combined efforts of the government and the RBI to spur investment and consumption demand would hopefully bear fruit and the economy may be bottoming out.

India\'s potential growth rate increased from 6% in late 1990s to above 8.5% in mid-2000s, thanks to gradual but consistent reforms. The feeling that the growth rate of 7%-plus is above potential at this stage is getting strengthened as inflation has been persistently high, even as growth slipped to less than 5.5%.

Reddy said: “When it comes to India, I jokingly said sometime back that the new normal rate of growth will be double of the old normal growth rate. The old was 3.5% (up to 70s), so now it is expected to be be around 7-8%. As you know even when (the growth was 9% immediately before the crisis), the RBI did indicate that it is a sign of overheating because the potential output was not that much. Much will depend on our savings and investment balance.” The former IAS official widely respected for acumen and refusal to flinch, recalled that many others had not concurred with him when he had said that a 9% growth rate was on the higher

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