The Reserve Bank of India seal appears on a gate outside the RBI headquarters in Mumbai. Photo: Reuters

Former governor of India’s central bank Yaga Venugopal Reddy has said the economy would need at least two years to ‘consolidate’ and claw back to higher growth levels after going through ‘shocks’ such as demonetization and indirect tax reform – Goods and Services Tax (GST).

Reddy said it is difficult to make a forecast on economic growth now or say when the economy will return to the potential growth levels of 7.5-8%, which is unlikely in the next 24 months, reports PTI.

He said the fall was due to both international factors, where global economic growth has been declining, and domestic issues like the negative shocks of demonetization and GST and the high quantum of non-performing assets of banks.

Reddy, however, said the economy was helped by the massive drop in crude oil price, which he emphasized was at a third of what it was during his governorship.

Reckless lending in the high growth years during the previous government and certain development in the telecom, power and coal sectors following graft charges created a lot of stress in the corporate world. As a result, bad loans in the system have jumped to almost 15%, or over Rs 10 trillion (US$ 150 billion) as of September quarter.

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 on India, said the potential output growth has come down to 7% from 8.5% before the crisis.

The lingering note-ban impact had seen growth rate plunging to a three-year low of 5.7% in the June quarter. Growth rate improved to 6.3% in the September quarter.

Implementation issues related to GST are still gnawing at the small and medium industries. The impact of this on overall growth will be visible only in the forthcoming quarters.

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