RBI's Raghuram Rajan warns against perils of breakneck economic growth

Reserve Bank Governor Raghuram Rajan on Friday warned against the hazards of growing at a break- neck speed and called for drawing right lessons from Brazil, which was a high growth market till recently but is now beset with economic woes, leading S&P to demote it to "junk" status.

Once praised for its robust economic growth, the South American country is facing massive public debt, corruption, sinking companies and bad loans.

Stating that growth has to be obtained in the right way, Rajan referred to the ongoing troubles in Brazil, which he said "offers a salutary lesson."

"Only a few years ago, the world was applauding its thriving democracy, robust economic growth, and the enormous strides it was making in reducing inequality.

"It grew at 7.6% in 2010...yet the country is expected to shrink by 3% this year, and its debt just got downgraded to junk," he said, adding stretching the public balance sheet too far is not the way for sustainable growth.

While the Brazilian authorities are working hard to rectify the situation following the last week's downgrading of its sovereign rating to junk status by S&P, Rajan said "let's not ignore the lessons their experience suggests."

"Paradoxical as it may seem, Brazil tried to grow too fast. The 7.6% growth came on the back of substantial stimulus after the global financial crisis. In an attempt to keep growth high, its central bank reportedly was pressed to reduce interest rates, fuelling a credit spree that overburdened customers who are now struggling to repay." Stating that such break-neck and induced growth is not advisable, the RBI Governor said, "growth has to be obtained in the right way. It is possible to grow too fast with substantial stimulus as we did in 2010 and 2011, but only to pay the price in higher inflation, higher deficits, and lower growth in 2013 and 2014."

But he was quick to add that India was not in the same situation today. "But with the world being an inhospitable place, we've to work hard to strengthen our current recovery and put it on a more sustainable footing." It can be noted that after a record-breaking growth of nearly a decade at an average of over 8.3%, which culminated in 2010-11 period on the back of fiscal and monetary stimulus following the 2008 global recession, the Indian economy slumped to a low of 4.5% FY14, while inflation reigned supreme at double-digit levels.

Offering support to return to higher growth trajectory Rajan said "while monetary policy will accommodate to the extent there is room, we'll expand sustainable growth potential only by continuing to implement reforms government and regulators have announced."