Predicting India's gross domestic product (GDP) growth in short-term is a very difficult task given shock factors like Goods and Services Tax (GST), demonitisation and the mountain of non-performing assets (NPAs) of banks, former Reserve Bank Governor Y V Reddy has said that Indian economy may require two more years to consolidate and it should aim to go back to 7.5-8 percent growth in two years. Besides, he pointed out that in a shock, negative element is front loaded and there will be some moderation, and there can be gain.
Reddy also indicated that the country’s economy was helped by a positive shock for almost three years, following the massive drop in crude price, which, he underlined, were at a third of what they were doing during his governorship. Reddy, whose conservative approach to regulation is lauded and described as one of the reasons which limited the impact of the 2008 global financial crisis, said the potential output growth rate has come down to 7 percent now from the 8.5 percent levels pre-crisis. He also explained that the drop is due to both international factors, where the global economic growth has declined and also domestic ones like the negative shocks.
Former RBI Governor further said that opinion is divided on how to look at these negative shocks, which he said are looked at by foreigners as institutional changes in India. He also said that all these three, some people take it has permanently affected potential output, whereas some others say it is a transitory shock. He noted that such shocks makes the methodology of estimating growth undependable in the short-term. He added that the RBI is expecting growth on a gross value added basis to shoot up to 7.8 percent by the fourth quarter of FY18, which it feels will pull the yearly growth rate up to 6.7 percent, which was maintained in the last policy review on December 6.
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