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 spill-over 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 for sure 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 is too fluid now. Projecting an economic expansion of around 8% 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 will be a flight of capital if the US economy slips into another recession in the wake of the last week's 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".
The former RBI governor said, "But I am of the view that in aggregate terms, the quantum of current fund inflows is sufficient to take care of our current account deficit and I am hopeful that we will be able to maintain it at 2.5% of GDP. But if it slips further, then it can pose problems."
On the possibility of a third round of qualitative easing (QE3) by the US Federal Reserve, Reddy said if the American fiscal policy was not that active, there will be a burden on the monetary policy.
On the impact of a possible QE3 on the domestic economy and the rest of the world, he said, "Ultimately, the mandate of the Fed is the domestic US economy and the Fed is expected to act only in that respect in the current precarious circumstance."
Reddy said in case of a slowdown, a downward spiral in the prices of commodities is expected.
He stated that if there is excess liquidity (in case the Fed goes in for a QE3), then it will have a debilitating impact on commodity prices. And if the prices cool, then it will definitely help in fighting inflation.
However, he added that "it is very fluid situation" and therefore difficult to make any firm projection.
Reddy further pointed out that the domestic fiscal and monetary situation is not as strong as it was in 2008 and warned that if there is a serious or prolonged slowdown in growth, then both the government as well the RBI will not have the legroom they did in 2008.
"Our fiscal position is not as strong as in 2008. So is the external position. Inflation is a big pressure now. Therefore, both the government and the central bank will find it more challenging this time around," Reddy said.
"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 the Lehman Brothers yanked down the global economy into one of the worst recessions," he added.
Therefore, as an advice to the RBI mandarins, Reddy said, "The key monetary focus should be domestic economy."
He refused to answer when asked what would be his advice 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."
On the extension of term for 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."