India can comfortably grow 7-8%, says Reddy

India can comfortably grow 7-8%, says Reddy
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First Published: Fri, May 08 2009. 07 20 PM IST
Updated: Fri, May 08 2009. 07 20 PM IST
Mumbai: India should emerge from its downturn ahead of developed economies, with recovery depending on an export revival as falling external demand was the main reason for slowing growth, the former head of the Reserve Bank of India said.
Yaga Venugopal Reddy, who stepped down as governor of the RBI last September after a five-year term, said India could comfortably achieve a growth rate of 7-8%, but growth faster than 9% could stretch its infrastructure.
“Infrastructure as a simple bottleneck does impose some limits to the extent to which you can boost growth entirely through fiscal stimulus without any effect on the inflation side,” he told Reuters in an interview.
Growth in India, Asia’s third-biggest economy, is expected to hit a seven-year low of 6% or less in the 2009-10 fiscal year that began on 1 April, after growing at or above 9% in the three years to 2007-08. Growth in 2008-09 is expected to have slowed to 7% or less.
“The cause of the slowing down essentially is the export demand,” Reddy said, adding even India’s diversified export basket was of little help in a global downturn.
Reddy spoke ahead of the release of his book, “India and the Global Financial Crisis”, a collection of 23 of his speeches as governor.
Merchandise exports, which account for about 15% of gross domestic product, fell by a third in March from a year earlier, the sixth straight monthly fall. Exports account for a smaller proportion of India’s economy than in many Asian countries.
The central bank has cut interest rates aggressively since last October to shore up growth, most recently at a review in April, and the government has also announced some stimulus measures but has been hampered by a large fiscal deficit.
The combined deficit of the federal and state governments has shot up to double digits as a percentage of gross domestic product on the stimulus spending and also a generous farm loan waiver scheme and pay hikes for federal workers announced when growth was stronger.
“The persisting high fiscal deficit reduces the scope for further reforms in the financial sector and also make it difficult for India to go on a higher growth path,” Reddy said.
“Because in the final analysis, it has an effect on crowding out”.
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First Published: Fri, May 08 2009. 07 20 PM IST
More Topics: Economy | India | Growth | Downturn | Infrastructure |