First Quarter Review of Annual Monetary Policy for 2008-09
I. Assessment of Macroeconomic and
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2. The growth of real gross domestic product (GDP) in 2007-08 was revised upwards to 9.0 per cent by the Central Statistical Organisation (CSO) in its end-May 2008 estimates from the advance estimates of 8.7 per cent released in February 2008. As per the revised estimates, real GDP originating inagriculture, industry and services rose by 4.5 per cent, 8.1 per cent and 10.7 per cent, respectively, in 2007-08 as compared with 3.8 per cent, 10.6 per cent and 11.2 per cent in the previous year. India's macroeconomic performance in 2007-08 is part of a phase of exceptionally high growth by historical standards, occurring as it did on top of 9.6 per cent in 2006-07 and 9.4 per cent in 2005-06. Accordingly, real GDP growth has averaged 8.8 per cent over the period 2003-08 as compared with 5.4 per cent in the preceding quinquennium.
3. The fourth advance estimates of the Ministry of Agriculture released on July 9, 2008 placed foodgrains production in 2007-08 at a record 230.7 million tonnes, substantially higher than the previous high of 217.3 million tonnes in the previous year. The production of nine major oilseeds and cotton rose by 18.6 per cent and 14.1 per cent, respectively, in 2007-08; however, the output of sugarcane and jute declined by 4.2 per cent and 1.4 per cent, respectively. During the current year's rabi marketing season (April 1-July 18, 2008), wheat procurement has doubled to 22.5 million tonnes from 11.1 million tonnes in the corresponding period of the previous year. The total stock of foodgrains with public agencies increased to 19.8 million tonnes as on April 1, 2008 which was higher than the buffer stock norm of 16.2 million tonnes and the stock of 17.9 million tonnes a year ago.
4. The south-west monsoon covered the entire country by July 10, 2008 – five days ahead of the usual onset. During the current season so far (up to July 23, 2008), the cumulative rainfall over the country as a whole has been 98 per cent of the long period average (LPA). Of the 36 meteorological subdivisions, 21 received excess or normal rainfall whereas 14 received deficient rainfall and rainfall in one meteorological subdivision was scanty. The deficient rainfall regions include Andhra Pradesh, Gujarat, Karnataka, Kerala, Konkan and Goa, Madhya Maharashtra and Vidarbha and some north-eastern States. The Marathwada region recorded scanty rainfall. As on July 17, 2008 the all-India live water storage in 81 major reservoirs was 28 per cent of the designated capacity which is 10 per cent higher than the last 10 years' average. According to the forecast of the India Meteorological Department (IMD) released at end-June 2008, the rainfall in the south-west monsoon season (June-September) this year is likely to be nearly 100 per cent of the LPA.
5. Of the normal area of 72.6 million hectares under kharif foodgrain crops, 29.0 million hectares were sown by July 18 this year, higher than 25.9 million hectares in the corresponding period last year. As regards commercial crops, the area sown under major oilseeds and jute was higher by 2.1 per cent and 22.5 per cent, respectively, whereas acreage under cotton and sugarcane declined by 16.9 per cent and 18.2 per cent, respectively, due to deficient rainfall in the major producing regions.
6. The index of industrial production (IIP) rose by 5.0 per cent during April-May 2008 vis-à-vis 10.9 per cent a year ago. Manufacturing output slowed to 5.3 per cent from 11.8 per cent during the same period. Electricity generation also decelerated to 1.7 per cent from 9.0 per cent, while mining activity picked up by 5.6 per cent as compared with 3.2 per cent a year ago. Within manufacturing, beverages, tobacco and related products, basic chemicals and chemical products and transport equipments and parts recorded double-digit growth. The production of basic metals and alloys, leather and fur products, cotton textiles, textile products and non-transport machinery and equipment recorded lower growth than during the corresponding period of 2007-08. The output of industries such as food products, rubber, plastic, petroleum and coal products, jute textiles, wood and wood products and metal products (non-machinery) declined. In terms of the use-based classification of industries, the loss of momentum was diffused across all constituent sub-sectors. The production of basic, capital, intermediate and consumer non-durable goods decelerated to 3.5 per cent, 6.5 per cent, 2.3 per cent and 8.8 per cent, respectively, from 9.4 per cent, 16.9 per cent, 9.7 per cent and 15.4 per cent during April-May 2007. Output of consumer durables, however, recorded a higher growth of 4.8 per cent as compared with 0.8 per cent a year ago. The six infrastructure industries, comprising nearly 27 per cent of the IIP, posted a lower growth of 3.5 per cent during April-May 2008 as against 6.9 per cent a year ago. Production picked up in respect of coal and crude oil whereas deceleration was recorded in the output of petroleum refinery products, electricity, cement and finished (carbon) steel.
7. Full information that has become available in July 2008 on corporate sector activity reveals that moderation from the high growth phase that began in 2002-03 had set in by the last quarter of 2006-07. Sales growth of selected non-financial private companies decelerated from 26.2 per cent in 2006-07 to 18.5 per cent in 2007-08. The growth of operating profits slowed to 18.6 per cent from 41.3 per cent in the previous year despite considerable cost-cutting initiatives by companies. The interest to gross profits ratio at 13.9 per cent in 2007-08 remained distinctly lower than the ratio of around 50 per cent in the 1990s and 43.7 per cent in the first half of the current decade. While there was a substantial rise in the cost of inputs including raw materials, staff compensation and funding of operations, an increase of 47.0 per cent in the income from non-core activities contributed to net profits that rose by 27.0 per cent. As a result, profitability measured in terms of the ratio of net income to sales improved to 11.8 per cent as against 10.7 per cent in 2006-07, with gains for manufacturing and non-IT services sectors. There was a marginal decline in the profitability ratio for information technology (IT) companies to 21.5 per cent from 22.7 per cent in 2006-07.
8. Early results of selected companies for the first quarter of 2008-09 are mixed, with sustained sales growth, accompanied by higher expenditure growth on account of increase in cost of raw materials, staff costs and interest payments. As a result, there was further deceleration in net profit growth, extending a phase that had set in during 2007-08. The pick-up in sales growth could be attributed to higher selling prices although volume growth continued to be the major driver. While investment conditions continued to be supported by favourable demand conditions, reliance on external sources of funds increased somewhat in view of lower retained profits of the selected companies.
9. The Reserve Bank's Industrial Outlook Survey conducted during May 2008 indicates some moderation in business confidence in the private corporate manufacturing sector. For April-June 2008, the assessment of growth in production and order books was somewhat lower than in the previous quarter and in the corresponding quarter last year. Close to 56 per cent of respondents reported no change in capacity utilisation. A majority of respondents also indicated no change in the financial situation, working capital finance requirements and availability of finance. Responses relating to export orders, imports and profits were generally mixed. The business expectations index for April-June 2008 declined by 5.4 per cent from its level in January-March, but was marginally higher (by 0.3 per cent) than in the corresponding quarter a year ago. For July-September 2008, nearly half of the respondents expect an improvement in the overall business situation and the outlook for production, order books and capacity utilisation is positive. In continuation of the assessment for the previous quarter, a majority of respondents expect no change in the financial situation, working capital finance requirements, availability of finance and profit margins. Expectations of rise in input costs and selling prices appear to have firmed up. The business expectations index for July-September 2008 is lower by 0.9 per cent than its level in the previous quarter but higher by 0.8 per cent than its level a year ago.
10. Business sentiment polled by other surveys reflects a similar though more broad-based moderation. One survey reported slower growth expectations for output, foreign trade and pre-tax profits for the next six months. A majority of the respondent firms propose to increase investments during the current year. Another survey reported a significant decline in business optimism due to increase in input costs, global economic instability and hardening of interest rates but nearly half the respondents intend to increase their manpower. In yet another survey, nearly two-third respondents expected increase in order books, exports and investment and nearly half expected to increase employment during April-September 2008. A large majority also expected raw material prices to increase. One survey's business optimism index recorded significant fall over the previous quarter as well as over a year ago, with a tempered outlook diffused across sales volume, inventory levels, new orders, selling prices, employment and net profits.Profit expectations moderated for the sixth consecutive quarter on the view that manufacturers may not be able to pass on the total increase in input costs to customers in the subdued demand conditions prevailing in the economy. Seasonally adjusted purchasing managers' indices for June 2008, however, indicated an improvement in manufacturing business conditions. Robust underlying demand and higher new order volumes combined with expansion plans point to a further increase in employment. Output prices increased at a faster rate than in the previous quarter and some improvement was reported in supplier delivery performance to maintain profitability in view of the rise in input costs.
11. Services sector activity appears to have been sustained in the first quarter of 2008-09 with indications of moderation in some sub-sectors. In the communication sector, 0.89 million lines were added to the switching capacity of telephone exchanges and 16.5 million new telephone connections (fixed plus cellular) were provided during April-May 2008 as compared with 11.2 million new subscribers added during the corresponding period of 2007-08. During the first quarter of 2008-09, railway revenue earning freight traffic increased by 9.4 per cent as compared with 5.4 per cent in the first quarter of 2007-08. Cargo handled at major ports increased by 10.3 per cent during April-May 2008 as against 17.7 per cent a year ago. In civil aviation, handling of import cargo and export cargo increased by 9.3 per cent and 7.6 per cent, respectively, as compared with 21.7 per cent and 1.6 per cent during April-May 2007. During the first quarter of 2008-09, foreign tourist arrivals increased by 10.2 per cent as against 8.2 per cent a year ago. There was deceleration in air traffic growth as passengers handled at domestic and international terminals increased by 5.9 per cent and 9.0 per cent, respectively, during April-May 2008 as against 24.4 per cent and 13.1 per cent, a year ago.
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