Second Quarter Review of Monetary Policy 2009-2010
-Announced on the 27th October 2009
Part A. Monetary Policy
I. Macroeconomic and Monetary Developments
15. The Indian economy posted a growth of 6.1 per cent for Q1 of 2009-10. This is higher than the expansion of 5.8 per cent in Q4 of 2008-09, but lower than the expansion of 7.8 per cent in the corresponding first quarter of 2008-09. The year-on-year (y-o-y) deceleration in growth was broad-based covering all the three major sectors, viz., agriculture, industry and services.
16. The south-west monsoon rainfall this year (June 1- September 30) was 23 per cent lower than the long-period average, the weakest since 1972. Twenty three of the 36 meteorological sub-divisions recorded deficient rainfall. The entire central and northern India received deficient rainfall. The Reserve Bank’s production-weighted rainfall index for 2009 was 73, significantly lower than the index number 104 for 2008. According to the latest information of progress of Kharif sowing, the acreage under paddy declined by 15.7 per cent and that under oilseeds by 5.2 per cent.
17. The share of agriculture in GDP has been declining over time, and as of 2008-09, it was 17.0 per cent. However, experience shows that a deficient rainfall can have a disproportionate impact on overall economic prospects and on the sense of well-being. Poor output will push up prices and depress rural labour incomes. Given the inter-sectoral supply-demand linkages, the knock-on impact on the industrial and services sectors can also be significant. The large stock of foodgrains of 44.3 million tonnes with public agencies, improved supply management, and the social safety net programmes could mitigate the adverse effects to an extent.
18. The industrial sector has shown clear signs of revival in recent months. The index of industrial production (IIP) increased at a higher rate of 5.8 per cent during April-August 2009 as compared with a growth of 4.8 per cent in the corresponding period of the previous year and 0.6 per cent growth in the second half of 2008-09. While the basic, intermediate and consumer durable goods sectors witnessed higher growth, the performance of the capital goods and consumer non-durable sectors was relatively modest. The core infrastructure sector, with a weight of 26.7 per cent in the IIP, posted a growth of 4.8 per cent during April-August 2009, up from 3.3 per cent in the corresponding period of the previous year. The leading indicators of industrial production, both quantitative and qualitative, also point to revival of industrial activity in the months ahead.
19. The performance of the services sector during April-July 2009 continued to follow the pattern witnessed in Q4 of 2008-09. Trade-related services such as cargo handled at major sea and airports continued to show deceleration/negative growth reflecting contraction of trade. The number of passengers handled at international terminals increased, albeit marginally, while the number of passengers handled at domestic terminals declined. Other domestic activity related services such as communication and construction have begun to show signs of upturn. The railway revenue-earning freight traffic recorded good growth.
Demand Components of GDP
20. Continuing the trend witnessed since Q2 of 2008-09, the two major components of demand, viz., private final consumption expenditure and gross fixed capital formation (with a combined weight of around 88 per cent) decelerated further in Q1 of 2009-10. Government consumption, which had increased sharply in Q3 and Q4 of 2008-09 due to the fiscal stimulus measures and the Sixth Pay Commission payouts, also decelerated in Q1 of 2009-10. While the direct impact of fiscal stimulus is waning, its indirect impact on private consumption and investment will persist for some more time. External demand continues to remain weak, whereas net exports turned positive in Q1 of 2009-10 because of a sharper decline in imports than in exports as compared with Q1 of 2008-09 .
21. Sales of the private non-financial corporate sector declined marginally (0.9 per cent) in Q1 of 2009-10 on a year-on-year basis as also in comparison with Q4 of 2008-09 (1.7 per cent). In the wake of the downturn, firms responded quickly to the changed cyclical conditions by reducing their inventories around Q2 of 2008-09. Now, with the onset of recovery in Q1 of 2009-10, the upturn is characterised by an increase in the stocks to sales ratio. Year-on-year growth in net profits also witnessed a turnaround in Q1 of 2009-10 after registering negative growth in the preceding three quarters
22. The Reserve Bank has been conducting a quarterly Industrial Outlook Survey of manufacturing companies since 1998. The survey tracks business expectations for the current quarter and business outlook for the following quarter. The latest round of the survey conducted during July-August 2009 showed a turnaround in the business sentiment. The assessment for Q2 of 2009-10 showed continuing upturn with a 7.8 per cent increase in the Business Expectations Index (BEI) over the previous quarter. Considerable improvement was noted in key indicators such as production, order books and capacity utilisation. The financing conditions were also reported to be better.
23. The outlook of manufacturing companies for Q3 of 2009-10 maintains its upward trend, with the BEI moving up to 116.4 from 109.9 in the previous quarter. The respondents expect production and capacity utilisation to improve further, working capital finance requirement to grow, the cost of raw materials to rise and pricing power to return to them. On the back of improved demand conditions, the manufacturing companies also expect further improvement in their employment situation. The findings of the Reserve Bank’s Industrial Outlook Survey are broadly consistent with business confidence surveys conducted by other agencies such as FICCI, NCAER, HSBC-Markit and Dun and Bradstreet.
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