India faces a risk of sustained low inflation, which may lead to dampening of its growth, former Chief Economic Advisor Kaushik Basu said on Monday.
"I feel in India inflation between 2 - 4 per cent is healthy.
There is a small risk that the inflation may go below 2 per cent.
Sustained low inflation can have dampening effect.
There is a genuine risk of growth slowing down a little bit more, " Basu told BTVi in an interview.
He said that in order to boost growth, the Reserve Bank of India should have gone for a 50 basis point (bps) cut in key lending rates rather than the recently announced 25 bps cut.
"I am very happy about RBI cutting repo rate.
But if I was voting for this, I would have recommended 50 bps cut.
Bigger cut would have given a shot in the arm, " he said.
Basu said that there is a risk that the growth could go below 6 per cent in a quarter or two as a result of short term negative impact of the demonetisation move.
"I am concerned about growth in the short run.
Demonetisation has had negative effect.
Few more months people will have to live with its negative effect, " he said.
The noted economist added that the roll - out of the Goods and Services Tax and the new Banking Regulation (Amendment) Bill, 2017 which authorises banks to initiate insolvency proceedings against the debt defaulters, would improve India's growth rate.
"These should be able to help India to come out of the negative effect of demonetisation.
I am optimistic about India's growth, " he said.
He said that the resolution of non - performing assets (NPAs) would also further resist cases of crony lending in the system and prevent creation of new bad loans.
"NPAs was building for quite some time.
The good thing is that there is a move to resist crony lending.
NPA was a result of crony lending.
The desirable effect in the long run is that we won't make the same mistakes again, " he said.