High growth unsustainable without infrastructure, says Reddy

Dinesh Unnikrishnan & K R Sudhaman

Mumbai, May 13 (PTI) A 9-10 per cent economic growth rate
for India is not sustainable without creating necessary
infrastructure like power, ports and roads, warns former
Reserve Bank of India Governor Y V Reddy.

"You should run at a speed that would strengthen your
muscles and if you run too fast it will affect your health,"
Reddy said, adding that ideally India should grow at eight per
cent plus from 2011.

"There is a general perception that the economy has the
potential to grow at 8-10 per cent but my own feeling is that
India can grow at eight per cent plus from 2011," Reddy told
PTI in a telephonic interview.

For the economy to grow higher than eight plus per cent,
"we do not have the level of infrastructure and elasticity in
supply," Reddy said, adding this meant it might lead to
overheating of the economy.

On full capital account convertibility (CAC), Reddy said
the global financial meltdown has endorsed India's view point
that the migration to CAC should be "careful, calibrated and
appropriate with an option to roll back whenever required."

The recent global crisis and the East-Asian currency
meltdown in late 90s have clearly established the prescription
for "rabid" capital account convertibility was not
appropriate, the former RBI Governor said.

"There is a definite feeling that every country must be
cautious about capital account liberalisation...we can not
afford full capital account liberalisation before we are
concomitant with other conditions."

Drawing lessons from the financial turmoil, Reddy said
that it was not enough for central banks to concentrate merely
on price stability but they also need to focus on financial
stability.

As far as the country's banking and financial systems are
concerned, Reddy said India and Canada are among the few
markets which had the resilience to withstand the downturn.

"There is no vulnerability as such... However, there can
be indirect effects. The indirect effects can be as part of
export-related slowdown and demand," Reddy said.

The RBI had taken corrective measures when the credit
off-take shot up in the banking industry, which, in turn, has
helped the system to face the difficult times, said Reddy, who
stepped down in September 2008 after a five-year stint at the
helm of India's central bank.

"When the credit off-take was growing rapidly, we had
taken special measures. They (banks) have been provided
adequate capital...there will be some stress, but banks will
not be entirely affected," Reddy said.

The global crisis has thrown into winds the idea of very
large-sized banks, some of which were badly hit in advanced
economies, he said.

"Now there is a global view that large-sized banks were
affected by the crisis... so by consolidation, we should mean
quality. In the global context it (very large-sized banks) is
not advisable."

However, on consolidation in the industry, Reddy said, it
also meant qualitative improvement and during the last five
years consolidation has happened in the banking sector.

But he made it clear that consolidation did not
necessarily mean mergers, which was totally different.

Reddy did not favor unbridled growth of non-banking
finance companies (NBFCs) and said they should be
appropriately regulated just like the banking sector.

Without elaborating, Reddy described the friction between
Finance Ministry and RBI, during the later part of his tenure,
as "constructive dialogues and creative tensions". PTI