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Macroeconomic and Monetary Developments in 2008-09 -Released on April 20, 2009

The Reserve Bank of India has released the document “Macroeconomic and Monetary Developments in 2008-09” to serve as a backdrop to the Annual Policy Statement for 2009-10 being announced on April 21, 2009.

The highlights of macroeconomic and monetary developments during 2008-09 are:


The global economic conditions deteriorated sharply during the year 2008 with several advanced economies experiencing their sharpest declines. The associated adverse shocks spread across emerging market economies (EMEs) particularly by the fourth quarter of the year and accentuated the synchronised global slowdown.

Inflation conditions witnessed sharp volatility during the year as headline inflation in major advanced economies firmed up considerably up to July 2008, but declined sharply thereafter.

The global financial environment entered a crisis phase in mid-September 2008, following the growing distress among large international financial institutions.

The knock-on effect of these unprecedented adverse global developments became evident in the macroeconomic performance of the Indian economy, as it experienced some loss of growth momentum with major drivers witnessing moderation. While private consumption and investment are witnessing moderation, the fiscal stimulus along with other committed expenditures of the Government could, however, arrest the moderation in growth.

An important challenge in the macroeconomic and monetary policy making during 2008-09 has been to manage the volatility emerging in respect of several key economic indicators of the Indian economy. Notwithstanding several challenges, particularly from the global economy, the Indian economy remained relatively resilient, its financial institutions and private corporate sector remained sound and solvent. Furthermore, the macroeconomic management helped in maintaining lower volatility in both the financial and the real sectors in India relative to several other advanced and emerging market economies.


The global financial crisis interrupted the growth momentum of India, despite the strong dominance of domestic sources of growth. There was clear moderation in growth by the third quarter of 2008-09. In relation to the agricultural sector, industry and services sectors have been affected more by the adverse external shocks, with some contribution to their growth deceleration arising from cyclical slowdown in certain sectors after a prolonged phase of high growth.

The Central Statistical Organisation (CSO)'s estimates (February 2009) of real GDP growth was placed at 5.3 per cent during the third quarter of 2008-09 as compared with 8.9 per cent during the corresponding quarter of the previous year, reflecting deceleration in growth of all its constituent sectors.

During 2008-09, the area covered under sowing of various crops declined marginally during the kharif season on account of moderate shortfall in rainfall. On the other hand, the prospects for rabi production remain favourable with area sown under rabi crops being higher than a year ago. Total foodgrains production during 2008-09 was placed at 227.9 million tonnes (Second Advance Estimates) as compared with 230.8 million tonnes during 2007-08.

In the wake of a near normal long range monsoon forecast of the India Meteorological Department (April 17, 2009) during the South-West monsoon season 2009, the prospects for agricultural production remain satisfactory.

The loss of growth momentum in the industrial sector was evident as the year-on-year expansion in the Index of Industrial Production was of 2.8 per cent during 2008-09 (April-February) as against 8.8 per cent in the corresponding period of the previous year. The manufacturing sector and the electricity sector registered growth of 2.8 per cent and 2.4 per cent as compared with 9.3 per cent and 6.6 per cent, respectively, during the above period.

The infrastructure sector recorded growth of 3.0 per cent during 2008-09 (April-February), down from 5.8 per cent during the corresponding period of the previous year, reflecting deceleration in all the sectors except coal.

In the context of the severity of the impact of the crisis on the real economy of countries around the world, the growth outcome reflects the resilience of the Indian economy.

Aggregate Demand

The role of aggregate demand in a phase of weakening growth impulses came to the forefront of public policy in 2008-09. The sharp contraction in external demand - as evident in falling global output, employment and global trade – clearly affected India’s export performance.

Domestic demand, in the form of both private consumption and investment expenditure moderated, particularly in the third quarter of 2008-09. However, Government final consumption, however, rose on account of discretionary fiscal stimulus measures and committed expenditures of the Central Government.

During 2008-09, the combined finances of the Central and State Governments were adversely impacted due to the economic slowdown. The Central Government finances came under stress during 2008-09, both on the revenue and the expenditure sides, on account of fiscal measures taken to reduce inflationary pressures during the first half and to arrest the moderation of economic growth in the second half of the year. As a result, the key deficit indicators viz., revenue deficit and fiscal deficit widened to 4.4 per cent and 6.0 per cent, respectively, in the revised estimates for 2008-09 from 1.0 per cent and 2.5 per cent, respectively, in the budget estimates.

The Union Interim Budget for 2009-10 has indicated the relaxation in the FRBM targets for 2008-09 and 2009-10, in order to ensure expansion in aggregate demand through fiscal stimulus measures. However, as a medium-term objective, it has recognised the need to revert to fiscal consolidation process at the earliest.

Corporate performance remained subdued during 2008-09 with the impact on profitability being particularly adverse during the third quarter.

The rate of Gross Domestic Saving (GDS) peaked at 37.7 per cent GDP in 2007-08, mainly due to improved saving performance of the private corporate and public sectors. The rate of Gross Domestic Capital Formation (GDCF) also peaked to 39.1 per cent of GDP in 2007-08. The saving-investment balance widened during 2007-08 reflecting continuous surge in investment activity ahead of the saving rate. The slowing of economic activity in 2008-09 may, however, affect both saving and investment rates for the year.



Click Here For Annual Policy Statement for 2009-10

Mixed reactions from Banks, Economists, India Inc on RBI Annual Policy ....Click Here

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