No major impact of US crisis on Indian economy: Y V Reddy

Ruling out any major impact of the ongoing crisis in the West on India’s GDP growth, former RBI governor Yaga Venugopal Reddy has said the impasse is “very fluid” and it is too early to assess its effect on the domestic economy.

Reddy, credited for firmly anchoring the domestic financial system and economy during the pre-crisis boom that helped the country tide over the 2008 disaster earlier than expected, said, “Though there will be some spillover effect on our economy, it won’t be that grave as our growth is primarily driven by domestic consumption.”

Ruling out a recession in the short term, he said a slowdown in global economic growth was certain in the mid-to medium-term.

“While the 2008 crisis was a revelation for everyone, the present crisis arising from the US downgrade by S&P and the lingering debt crisis in the Eurozone economies, is a realisation of the fact that the fundamental problems are still not rectified,” Reddy told PTI over the phone from Hyderabad.

However, he cautioned that it was too early to assess the development as the situation was too fluid. Projecting an economic expansion of around eight per cent for the domestic economy, with a downward bias, he said to achieve that growth rate, our policy focus has to be fine-tuned at the earliest.

Whether there would be a flight of capital if the US economy slips into another recession in the wake of the last week's credit downgrade-from AAA to AA+, Reddy said, “If there is excess liquidity in the US system, then we have a fair chance of getting more capital inflows. But if a serious slowdown kicks in, there could be volatility in the fund inflows”.

“This is more so because the global situation is more complex and fluid today than it was in 2008. Moreover, the inherent strength of the economy is not as strong as it was three years (back) when the fall of Lehman Brothers yanked down the global economy into one of the worst recessions,” he added. Therefore, Reddy says “the key monetary focus should be domestic economy.”

He refused to answer when asked what would be his advice to the Mint Road in this situation, saying, “whatever the governor is doing now is on the basis of well informed choice. I have trust in the current RBI governor.” When sought his view on the second term for the incumbent Governor Duvvuri Subbarao, Reddy said, “I am very happy that the government has given him an extension.”

It was granted that he would get an extension and that it is only a formalisation of continuity.”