Macroeconomic and Monetary Developments in 2009-10
-Released on April 19, 2010
The Reserve Bank of India on 19th April 2010 released the document Macroeconomic and Monetary Developments in 2009-10, which serves as a background to the Monetary Policy Statement 2010-11 to be announced on April 20, 2010.
The highlights of macroeconomic and monetary developments during 2009-10 are:
With the improving growth outlook, monetary and fiscal exit measures have started.
While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth.
In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses.
Global Economic Conditions
Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery, however, remains significantly divergent. The projections for global output for 2010 generally point to consolidating recovery, led by the Emerging Market Economies (EMEs). The WTO projects world trade to stage a strong recovery in 2010.
The risks to the overall global macroeconomic environment have, however, increased because of large public debt in advanced economies, on the back of concerns relating to reduction in potential output, high unemployment rates, impaired financial systems and premature exit from the policy stimulus.
With stronger recovery in EMEs driven largely by domestic demand, improving exports and return of capital flows, EMEs face the risks of inflation and asset price build up.
The Indian economy exhibited clear momentum in recovery, and despite the impact of a deficient monsoon on agricultural production, GDP growth for 2009-10 has been estimated at 7.2 per cent, up from 6.7 per cent recorded in 2008-09.
Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector.
Survey data suggest pick up in capacity utilization levels in recent months, which still remain below the previous peaks.
Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normal monsoon. Support for sustained momentum in growth can be expected from all three major components, viz., agriculture, industry and services.
Final consumption expenditure remained subdued during 2009-10, as growth in both private final consumption expenditure and government final consumption expenditure decelerated. Investment demand, particularly gross fixed capital formation, however, showed a gradual recovery during the year.
While the momentum in investment demand is expected to continue, pick-up in private consumption demand could drive the recovery in growth. Growth in corporates sales, after remaining significantly depressed over four consecutive quarters, staged a strong recovery in Q3 of 2009-10, indicating improving private demand conditions.
The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary.
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