RBI deputy governor Viral Acharya has called for a more sustainable remodelling of growth strategies to structural changes in the economy, even as he said double-digit growth is not always sustainable.
Acharya has warned that such faster paced GDP expansion is always debt-driven and could crash at some point with disastrous consequences. He said the focus of economic development should be on structurally setting the economy on the right direction so that when it gets its mojo back, growth can pick up at a more sustainable pace.
"I think, invariably, the episodes of 9 to 10 per cent growth are all laden with massive debt-based funding of some asset class," Acharya told an Asia Society event last night.
"I get scared when an economy grows at 9 to 10 per cent because it is not that easy to generate sustainable growth of 9 to 10 per cent. You got to have generated tremendous improvement in your productivity in a short period to be able to deliver that kind of growth," he added.
An economy growing at a furious pace will come crashing down and "we have already witnessed such crashes right here as well as elsewhere in the past," he said.
With focus on inflation control and other measures to correct the balance sheets of companies and banks, "the RBI in its own way is paving the way for more sustainable growth for over next three to five year horizon down the road," he said.
"It would be a mistake if we do not repair our balance sheets in a quick and an efficient manner now so that we can start growing fast in a sustainable way," Acharya said.
On inflation targeting, he said, it is the right thing to embark on as "now there is much clearer purpose in setting up interest rates than we had in the past."
He said, having accumulated unsustainable levels of bad loans, banks will have to undergo painful haircuts in the short rum and the bankruptcy code will significantly enhance the process of recovery. But, once resolved, the small haircuts will ease the pain and avert the possibility of a crash landing of the banking system
"Even though things might look a little painful in the short-run, because when you resolve assets you take haircuts on bank-balance sheets, leaving you with large losses, I think this is the pain we must accept as the imbalances have really been building up over a long period," he said.
Acharya said it's too much to expect that investments in private assets will suddenly come back given the large bad assets in the system which is over Rs8,00,000 crore now. But, he also said the bad loan resolution will not stop companies from investing either.