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Macroeconomic and Monetary Developments: Mid-Term Review 2007-08
-Announced on the 29th October 2007
The Reserve Bank of India today released the document “Macroeconomic and Monetary Developments: Mid-Term Review 2007-08” to serve as a backdrop to the Mid-Term Review of the Annual Policy Statement for 2007-08 being announced on October 30, 2007.
The highlights of macroeconomic and monetary developments during 2007-08 so far are:
The Real Economy
The Indian economy continued to maintain strong growth momentum during the first quarter of 2007-08, underpinned by sustained performances of the manufacturing and services sectors. According to the estimates released by the Central Statistical Organisation (CSO) in August 2007, real GDP growth was 9.3 per cent during the first quarter of 2007-08 as compared with 9.6 per cent during the same period in 2006-07.
The cumulative rainfall during the South-West monsoon season 2007 (June to September) was 5 per cent above normal as compared with one per cent below normal during the corresponding period of the previous year. The area coverage of kharif crops has increased during 2007-08 (as on October 12, 2007) with reported sown area of 104.7 per cent of the normal, which was about 3.1 per cent higher than the previous year.
During April-August 2007, the index of industrial production rose by 9.8 per cent as compared with a growth of 11.0 per cent recorded during the corresponding period of the previous year. The manufacturing sector registered a growth of 10.3 per cent during April-August 2007 on top of 12.2 per cent during April-August 2006.
During April-August 2007, the infrastructure sector recorded a growth of 6.6 per cent as compared with 8.3 per cent a year ago, with five of the six core infrastructure industries registering a deceleration. The electricity sector was the only sector which recorded a higher growth than a year ago.
The services sector continued to record double-digit growth (10.6 per cent) in April-June 2007. Leading indicators of service sector activity for April-August 2007 show that cargo handled at major ports and import cargo handled by civil aviation witnessed strong growth. Growth rates in commercial vehicle production, new cell phone connections, passengers handled by civil aviation and steel moderated during 2007-08 (April-August), albeit over a high base.
Fiscal situation
Available information on Central Government finances for 2007-08 (April-August) indicates that gross fiscal deficit (as proportion of the budget estimates) was placed higher than a year ago. Revenue deficit (adjusted for profit on sale of Reserve Bank’s stake in SBI) was 122.9 per cent of the full year budget estimates. Tax revenue remained buoyant, rising by 22.0 per cent over that during April-August 2006. Non-tax revenue (net of profit on sale of Reserve Bank’s stake in SBI) registered a growth of 21.2 per cent during the same period. Aggregate expenditure (adjusted for acquisition cost of Reserve Bank’s stake in SBI) increased mainly on account of sharp increase in revenue expenditure and plan capital expenditure.
Gross and net market borrowings (including 364-day Treasury Bills) of the Central Government during 2007-08 (up to October 22, 2007) were Rs.1,26,036 crore and Rs.75,363 crore, respectively, accounting for 66.7 per cent and 68.7 per cent of the estimated borrowings for the year.
During 2007-08 (up to October 22, 2007), the States raised market loans amounting to Rs.20,362 crore (50.1 per cent of gross allocation) through auctions.
Price Situation
Headline inflation generally edged up in major economies during the quarter ended September 2007 as compared with the previous quarter. Many central banks further tightened monetary policy during the second quarter of 2007-08 against the backdrop of persistent inflationary pressures represented by core inflation, especially in view of continued strength of demand, ample liquidity and possible pass-through from past and present increases in oil and other commodity prices.
Global commodity prices remained firm during the second quarter of 2007-08 led by food and crude oil prices, although there was some moderation in prices of metals during the quarter. International crude (WTI) prices crossed US $ 80 a barrel by mid-September 2007 and reached a historical peak on October 18, 2007 at US $ 89.5 a barrel, partly due to heightened geopolitical tensions in West Asia and the weakening of the US dollar. Food prices increased further led by wheat and oilseeds/edible oils, reflecting a shortfall in global production, decline in stocks and rising demand for non-food uses.
In India, inflation based on the wholesale price index (WPI) eased from 4.4 per cent at end-June 2007 to 3.1 per cent by October 13, 2007, partly due to base effects and negative contribution from fuel prices.
Consumer price inflation, however, remained firm during the second quarter of 2007-08 and continued to be above the WPI inflation, mainly reflecting the impact of higher food prices. Various measures of consumer price inflation were placed in the range of 5.7-7.9 per cent during August/September 2007 as compared with 5.7-7.8 per cent in June 2007 (and 6.7-9.5 per cent in March 2007).
Fuel group inflation turned negative beginning the week ended June 9, 2007 and remained so (-1.6 per cent) on October 13, 2007, easing from 5.0 per cent a year ago, reflecting the cuts in domestic prices of petrol, diesel and other fuel products in November 2006 and February 2007. Primary articles’ inflation eased to 5.2 per cent on October 13, 2007 from 9.3 per cent at end-June 2007 and 8.1 per cent a year ago. Manufactured products inflation eased to 4.1 per cent on October 13, 2007 from 4.9 per cent at end-June 2007 and 4.6 per cent a year ago.
Pre-emptive monetary measures since mid-2004 accompanied by fiscal and supply-side measures have helped in containing inflation.
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