Acharya warns of pitfalls of debt—driven “furious growth”

Acharya said that instead the focus now must be to structurally set the economy on the right direction so that when it gets its mojo back growth can pick up at a pace that will be more sustainable.

“I think, invariably, the episodes of 9 to 10 % growth are all laden with massive debt—based funding of some asset class,” Acharya told an Asia Society event on Wednesday.

Expressing his apprehensions over such a state of the economy, he said, “I get scared when an economy grows at 9 to 10 % because it is not that easy to generate sustainable growth of 9 to 10 %. You got to have generated tremendous improvement in your productivity in a short period to be able to deliver that kind of growth.”

But unfortunately such an economy will come crashing down and “we have already witnessed such crashes hereas 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.

Defending the 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.”

Describing the bankruptcy code as a significant stride in starting to resolve stressed assets, he said “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.”

Last week, RBI Governor Urjit Patel had also warned that the banks, especially the state—run banks, would have to take huge haircuts on their current exposures under any resolution plan agreed within or outside the IBC.

Acharya said it’s too much to expect that private capex will suddenly and quickly come back given the large bad assets in the system which is over ₹ 8 trillion now. But he expressed optimism that companies would start investing again.