Macroeconomic and Monetary Developments : Third Quarter Review 2009-10
-Released on January 28, 2009
The Reserve Bank of India today released the document Macroeconomic and Monetary Developments: Third Quarter Review 2009-10, which serves as a background to the Third Quarter Review of Monetary Policy 2009-10 to be announced on January 29, 2010.
Global Economic Conditions
The global outlook improved significantly in the third quarter of 2009, with most advanced economies posting positive growth.
The IMF, in its January 2010 update, has revised significantly the global growth outlook for 2010 (from the earlier projected 3.1 per cent to 3.9 per cent). Recovery in advanced economies is, however, expected to remain sluggish, while economic activity in emerging market economies (EMEs) and developing economies could expand vigorously, driven by domestic demand.
The pace and shape of recovery continue to remain uncertain. By far the biggest anxiety is about the recovery losing momentum once the props of fiscal stimulus and monetary accommodation are withdrawn.
In advanced economies, there are concerns about higher unemployment levels, growing fiscal deficits and continued credit recession to productive sectors.
Emerging economies, which are already on the recovery path, face various challenges from capital flows, potential inflationary pressures and credit revival.
While the short-term debate is centered around the timing and sequencing of exit policies, several medium-term issues have come to the fore. These include the growing debt burden of Governments, permanent loss of output owing to capital destruction, addressing global imbalances and reforming the regulatory architectures.
At 7.9 per cent, GDP growth in the second quarter of 2009-10 showed continuation of the recovery witnessed in the first quarter.
Agriculture and allied activities registered a better than expected growth of 0.9 per cent. However, this reflects only a part of the overall adverse impact of the deficient south-west monsoon on kharif output.
According to the first advance estimates, production of kharif foodgrains and oilseeds is expected to decline by about 16 per cent over the previous year.
Strong industrial recovery has been the key underlying strength behind the recovery of GDP in the second quarter. The core infrastructure sector also exhibited stronger growth during April-December 2009.
Services activities (accounting for 64.5 per cent of the GDP) registered a growth of 9.0 per cent in the second quarter of 2009-10. The recovery was largely driven by 12.7 per cent growth in “community, social and personal services” reflecting payouts of arrears relating to the Sixth Pay Commission award. Excluding the arrears, the services sector growth would have been 7.0 per cent during the second quarter of 2009-10.
Lead indicators for services activities suggest that services dependent on domestic demand exhibited robust growth during April-December 2009, and services dependent on external demand have also shown some improvement in recent months.
Sharp deceleration in the growth of private consumption demand to 1.6 per cent in the first quarter of 2009-10 - in addition to subdued growth in investment demand - had emerged as the key constraint to a faster recovery in GDP growth.
In the second quarter of 2009-10, however, private consumption demand registered a growth of 5.6 per cent, which is the highest in last six quarters.
Investment demand, in terms of growth in gross fixed capital formation, also exhibited a growth of 7.3 per cent, which is the highest in the last four quarters. Adjusted for the decline in inventories in the second quarter, however, the growth was moderate.
Growth in government consumption expenditure, which had to offset the impact of deceleration in private demand on economic growth in the wake of the global recession, continues to outpace growth in private demand in the last four quarters.
In the second quarter of 2009-10, government consumption expenditure increased by 27 per cent, which is partly on account of the payment of arrears relating to the Sixth Pay Commission Award.
Corporate performance data up to the second quarter of 2009-10 indicate that despite the persistence of dampened (y-on-y) growth in sales, sequential quarterly growth remained positive. In the third quarter of 2009-10, partial data indicate significant (Y-o-Y) growth in sales.
Merchandise exports registered a positive growth of 18.2 per cent in November 2009 after a phase of decline over thirteen consecutive months and the pace of decline in imports also moderated significantly to 2.6 per cent.
The current account deficit in the balance of payments in the second quarter of 2009-10 remained at the same level as in the corresponding period of last year.
Signs of resumption in capital inflows that were evident in the first quarter of 2009-10, improved significantly in the second quarter. Latest information on specific components of capital flows suggests that even in the third quarter of 2009-10, net inflows sustained the revival.
Due to allocation of SDRs by the IMF and purchase of gold by the Reserve Bank from the IMF, the level and composition of the country’s foreign exchange reserves have changed in the recent period. It increased from US$ 252 billion at end-March 2009 to US$ 285.2 billion as on January 15, 2010.
In the context of the expected surge in capital flows to EMEs, assessment and monitoring of the macroeconomic ramifications of large capital inflows would be a challenge.
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