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Macroeconomic and Monetary Developments in 2007-08
-Announced on the 28th April 2008

The Reserve Bank of India on 28th April 2008 released the document “Macroeconomic and Monetary Developments in 2007-08” to serve as a backdrop to the Annual Policy Statement for 2008-09 being announced on April 29, 2008.

The highlights of macroeconomic and monetary developments during 2007-08 are:

The Real Economy

The Indian economy continued to expand at a robust pace during 2007-08 for the fifth consecutive year. According to the advance estimates released by Central Statistical Organisation (CSO), the real GDP growth rate was placed at 8.7 per cent in 2007-08 as compared with 9.6 per cent in 2006-07, reflecting moderation in growth in all the three sectors, viz., agriculture and allied activities, industry and services. Notwithstanding the moderation, the growth performance was in tune with the high average real GDP growth of 8.7 per cent per annum during the five-year period, 2003-04 to 2007-08.

According to the Third Advance Estimates for 2007-08, the total foodgrains production is slated to reach an all-time high at 227.3 million tonnes, recording an increase of 4.6 per cent over the previous year (217.3 million tonnes). The production during 2007-08 would exceed the target set earlier (221.5 million tonnes) by 5.8 million tonnes.

During 2007-08 (April-February) the index of industrial production (IIP) rose by 8.7 per cent as compared with an increase of 11.2 per cent during 2006-07 (April-February). The manufacturing sector recorded a growth of 9.1 per cent during 2007-08 (April-February) as compared with 12.2 per cent during April-February 2006-07.

During2007-08(April-February), growth of the infrastructure sector was placed at 5.6 per cent as compared with 8.7 per cent during the corresponding period of the previous year, reflecting deceleration in all the sectors, except coal.

The services sector maintained its double-digit growth at 10.6 per cent during 2007-08 despite some moderation in pace. It continued to be the major contributor to GDP growth. Leading indicators of service sector activity for April-February 2007-08 suggest that the growth rates in tourist arrivals, revenue earning freight traffic of the railways, commercial vehicles production, new cell phone connections, passengers handled by civil aviation at domestic terminals, cement and steel moderated over the previous year.

Gross Domestic Saving (GDS), as percentage of GDP at current market prices, was placed at 34.8 per cent in 2006-07 as compared with 34.3 per cent in 2005-06, reflecting improved saving performance by the private corporate and public sectors. On the other hand, the household saving rate declined marginally in 2006-07 from the previous year on account of decline in the financial saving rate. The sales and net profits of Reserve Bank’s sample non-government non-financial companies moderated during 2007-08 (up to December 2007) relative to the previous year. However, gross profits to sales ratio improved marginally over the same period.

Fiscal Situation

The process of fiscal correction and consolidation under the Fiscal Responsibility and Budget Management (FRBM) Act continued for the Central Government during 2007-08; the revised estimates (RE) for the year placed the revenue deficit and gross fiscal deficit at 1.4 per cent and 3.1 per cent of GDP, respectively, which were lower than the budget estimates, both in absolute terms and relative to GDP. The reduction in GFD and revenue deficit by 0.4 per cent and 0.5 per cent of GDP, respectively, during 2007-08 (RE) over 2006-07 met the stipulated minimum threshold levels of 0.3 per cent and 0.5 per cent of GDP for GFD and revenue deficit, respectively, under the FRBM Rules, 2004. Gross primary surplus of the Centre was placed higher at 0.6 per cent of GDP during 2007-08 (RE) than 0.2 per cent in the budget estimates for the same year.

According to the Reserve Bank records, gross and net market borrowings (including 364-day Treasury Bills) during 2007-08 amounted to Rs.1,88,205 crore and Rs.1,09,504 crore, respectively, accounting for 99.7 per cent and 99.9 per cent of the estimated borrowings for the year. The weighted average maturity of dated securities issued during 2007-08 at 14.90 years was higher than that of 14.72 years during the previous year. The weighted average yield of dated securities issued during 2007-08 was 8.12 per cent as compared with 7.89 per cent during 2006-07.

The State Governments budgeted a revenue surplus of 0.3 per cent of GDP in 2007-08 as against revenue deficit (RD) of 0.1 per cent in 2006-07 (RE). The gross fiscal deficit (GFD) was budgeted at 2.3 per cent of GDP in 2007-08, lower by 0.4 percentage points over the previous year.

During 2007-08, the States (including the Union Territory of Puducherry) raised market loans amounting to Rs. 67,779 crore (84.1 per cent of gross allocation) through auctions, as compared with Rs.20,825 crore (78.3 per cent of gross allocation) during the previous year. The cut-off yield was placed at 7.84-8.90 per cent. The weighted average yield on market loans firmed up to 8.25 per cent during 2007-08 from 8.10 per cent in the previous year.

The average daily utilisation of WMA and overdraft by the States during 2007-08 was Rs. 648 crore, as against Rs.248 crore during 2006-07. The cash surplus position of the States, as reflected in their investments in Treasury Bills (14-day and auction Treasury Bills), remained sizeable. The average investment by the States in Treasury Bills during 2007-08 amounted to Rs.73,680 crore as against Rs.63,718 crore during the previous year.

The Union Budget for 2008-09 proposed to continue the fiscal consolidation process, with the key deficit indicators, viz., revenue deficit and GFD, budgeted to be lower by 0.4-0.6 percentage points and primary surplus higher by 0.5 percentage points of GDP in 2008-09 than in the previous year. While the FRBM targets relating to GFD are set to be achieved in accordance with the mandate, the Budget proposed to reschedule the stipulated target of zero revenue deficit by 2008-09 under FRBM Rules, 2004, primarily on account of a shift in plan priorities in favour of revenue expenditure-intensive programmes and schemes.

Monetary and Liquidity Conditions

Broad money growth (M3), on a year-on-year (y-o-y) basis, was at 20.7 per cent (Rs. 6,86,096 crore) as at end-March 2008 as compared with 21.5 per cent (Rs. 5,86,548 crore) a year ago.

Aggregate deposits of banks, y-o-y, increased by 21.2 per cent (Rs.5,99,687 crore) as at end-March 2008 as compared with 22.3 per cent (Rs. 5,16,134 crore) a year ago.

Growth in bank credit moderated during 2007-08 after the strong pace in the preceding three years. Non-food credit by scheduled commercial banks (SCBs) expanded by 22.3 per cent (Rs.4,19,425 crore), y-o-y, as on March 28, 2008 as compared with 28.5 per cent (Rs.4,18,282 crore) a year ago.

Reserve money growth was higher at 30.9 per cent, y-o-y, as on March 31, 2008 than 23.7 per cent a year ago, reflecting the year-end liquidity requirements of the banks. Adjusted for the first round impact of the hike in the cash reserve ratio, reserve money growth was 25.3 per cent as compared with 18.9 per cent a year ago.

Liquidity conditions during 2007-08 continued to be influenced by variation in cash balances of the Governments and capital flows. The Reserve Bank continued with the policy of active management of liquidity through appropriate use of the cash reserve ratio (CRR) and open market operations (OMO), including issuances of securities under the market stabilisation scheme (MSS) and operations under the liquidity adjustment facility (LAF).


Click Here For Annual Policy Statement for the Year 2008-09

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