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click here to return to main page of Mid-term Review of Annual Policy for the year 2004-05
Mid-term Review of Annual Policy 2004-05- 26th Oct 2004
I. Mid-term Review of Macroeconomic and Monetary Developments in 2004-05
Domestic Developments
2. The annual policy Statement released on May 18, 2004 projected real GDP growth for 2004-05 in the range of 6.5-7.0 per cent on the assumption of normal monsoon, sustained growth of the industrial sector and good performance of exports. As per the India Meteorological Department (IMD), the South-West monsoon rainfall has been 87 per cent of its long period average. Rainfall was normal in 23 out of 36 meteorological sub-divisions of the country, but it was deficient in the remaining 13 sub-divisions. Output of major Kharif crops this year may be lower than their corresponding levels last year. It is, however, anticipated that Rabi crops would be favourable. While the prospects are still somewhat unclear, the current assessments clearly indicate that agricultural growth of 3.0 per cent, projected earlier, will not materialise.
3. There are indications that the prospects for growth in industrial output have improved. The index of industrial production (IIP) increased by 7.9 per cent during April-August 2004 as compared with the increase of 5.9 per cent in the corresponding period of the previous year. There are signs of sustained growth in the production of basic goods, capital goods, intermediate goods and consumer durables. The index of six major infrastructure industries increased by 5.6 per cent during April-August 2004 as compared with the increase of 4.2 per cent in the corresponding period of the previous year. Further, India's exports continue to remain buoyant. Exports increased by 24.4 per cent in US dollar terms during April-September 2004 as against 8.1 per cent in the corresponding period of the previous year.
4. According to the revised estimates by the Central Statistical Organisation (CSO), real GDP increased by 8.2 per cent during 2003-04 as against 4.0 per cent during 2002-03. The data available for the first quarter of 2004-05 show that real GDP increased by 7.4 per cent as against 5.3 per cent in the first quarter of the previous year. While the CSO estimate of GDP for the first quarter is consistent with the earlier projected growth of 6.5-7.0 per cent for the full fiscal year, the deficient rainfall in some parts of the country and its impact on Kharif crop impart a downward bias to this growth projection. In addition, the higher oil prices tend to have an adverse impact on GDP growth. At the same time, the improved prospects for growth in industrial output and continued buoyancy in exports are likely to have a positive impact on growth. On the whole, while the picture is not very clear, it may be reasonable to place the overall GDP growth for the year 2004-05 in the range of 6.0 to 6.5 per cent as against the earlier expectation of 6.5-7.0 per cent, assuming that the combined downside risks of high and uncertain oil prices, and sudden changes in international liquidity environment remain manageable. India would thus remain among the faster growing economies in the world in 2004-05.
5. Various business expectation surveys including RBI’s own assessment point to a reasonable air of optimism regarding growth. The corporate results continue to be good and cash flows so generated may get translated into higher investment. Non-food credit growth remains strong. Private corporate investments are expected to be higher. The overall economic environment remains supportive of investment and capacity building, given the economy’s resilience to withstand shocks. While exports of services remain buoyant, there is growing confidence for exporting manufactured goods. There is significant acceleration in international business and investor confidence in India.
6. During 2004-05, scheduled commercial banks’ credit increased by 11.3 per cent (Rs.95,120 crore) up to October 1, 2004 which was substantially higher than the increase of 4.0 per cent (Rs.28,927 crore) in the corresponding period of last year. Food credit increased by Rs.2,677 crore as against a decline of Rs.12,107 crore in the previous year reflecting a turn-around of about Rs.14,800 crore. Non-food credit posted a robust increase of 11.5 per cent (Rs.92,443 crore) as compared with an increase of 6.0 per cent (Rs.41,034 crore) in the corresponding period of the previous year. The incremental non-food credit-deposit ratio was as high as 96 per cent as against 38 per cent in the corresponding period of the previous year.
7. In the recent years, the impetus to credit growth has emanated from non-agriculture non-industrial sectors, particularly, housing, small transport operators and retail loans. The detailed information on sectoral deployment of credit available from banks reveals that over two-thirds of credit flow during the current financial year (up to August 2004) have been on account of retail, housing and other priority sector loans. More recent information available up to September 2004 points to a revival of industrial credit. Among industries, discernible increase is observed in petroleum, infrastructure, electricity, construction, metal & metal products, drugs & pharmaceuticals, gems & jewellery and automobiles.
8. While credit expanded, scheduled commercial banks’ investments in bonds/debentures/shares of public sector undertakings and private corporate sector, commercial paper (CP) etc., declined by 4.8 per cent (Rs.4,255 crore) up to October 1, 2004 as compared with a decline of 1.1 per cent (Rs.1,043 crore). Notwithstanding the decline in such investments, the total flow of resources from scheduled commercial banks to the commercial sector increased substantially by 9.9 per cent (Rs.88,188 crore) up to October 1, 2004 as compared with the increase of Rs.39,991 crore in the corresponding period of the previous year. The year-on-year growth in resource flow was also higher at 20.9 per cent as against 14.3 per cent a year ago. Scheduled commercial banks’ investments in instruments issued by financial institutions (FIs) and mutual funds this year declined by Rs.2,570 crore as against an increase of Rs.6,204 crore in the previous year. The total flow of resources to the commercial sector including capital issues, global depository receipts (GDRs)/american depository receipts (ADRs) and borrowings from banks and FIs increased by Rs.1,08,510 crore up to October 1, 2004 as compared with Rs.66,863 crore in the corresponding period of the previous year.
9. In the current financial year up to October 1, 2004, money supply (M3) increased by 5.4 per cent (Rs.1,07,657 crore) as compared with 7.8 per cent (Rs.1,33,901 crore) in the corresponding period of the previous year. On an annual basis, growth in M3 at 14.0 per cent was, however, higher than 11.9 per cent in the previous year. Aggregate deposits of scheduled commercial banks rose by 6.4 per cent (Rs.96,598 crore) as compared with an increase of 8.3 per cent (Rs.1,06,782 crore) in the corresponding period of the previous year. The lower deposit growth this year could be mainly attributed to reduction in non-resident Indian (NRI) deposits with the banking system. On an annual basis, the growth in aggregate deposits at 15.4 per cent was, however, higher than that of 11.7 per cent a year ago. Overall, while M3 growth has reverted from its peak level of 16.2 per cent at the beginning of the year to a level envisaged in the annual policy Statement, the possibility of a higher M3 growth in the event of continued strong credit growth and overhang of liquidity cannot altogether be ruled out.
10. Reserve money increased by 0.6 per cent (Rs.2,535 crore) in the current financial year up to October 15, 2004 as compared with an increase of 0.9 per cent (Rs.3,216 crore) in the corresponding period of the previous year. While currency in circulation increased by 4.3 per cent (Rs.14,036 crore) as compared with 6.6 per cent (Rs.18,758 crore) in the corresponding period of the previous year, bankers’ deposits with RBI decreased by 12.4 per cent (Rs.12,930 crore) as compared with an increase of 18.9 per cent (Rs.15,763 crore). As regards the sources of reserve money, net RBI credit to the Central Government declined by Rs.21,395 crore as compared with a decline of Rs.53,466 crore in the corresponding period of the previous year. On the other hand, RBI’s net foreign currency assets (adjusted for revaluation), increased by Rs.30,604 crore on top of an increase of Rs.62,945 crore during the corresponding period of the previous year. RBI’s credit to banks and commercial sector continued to decline because of reduced reliance on the standing facilities on account of comfortable liquidity conditions. The year-on-year increase in reserve money was 17.9 per cent as on October 15, 2004 as compared with 10.9 per cent a year ago.
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