Macroeconomic and Monetary Developments: Second Quarter Review 2009-10
-Released on October 26, 2009
The Reserve Bank of India has released the document “Macroeconomic and Monetary Developments: Second Quarter Review 2009-10” which serves as a background to the Second Quarter Review of its Monetary Policy 2009-2010 being announced on October 27, 2009.
The highlights of macroeconomic and monetary developments are the following:
Global Economic Conditions
Global economy has started exhibiting tentative signs of recovery, signalling the winding down of global recession. Global recovery is, however, widely perceived to remain slow and gradual, with receding but significant downside risks.
After a series of successive and frequent downward revisions to the growth outlook of the world economy for 2009, the IMF has revised the projected growth upwards for the first time from (-) 1.4 per cent to (-) 1.1 per cent in October 2009.
According to the WTO, world merchandise exports increased by about 8.0 per cent in the second quarter of 2009 over the preceding quarter, even though year-on-year growth continued to decline by 33.0 per cent.
Estimates of the Institute of International Finance (IIF) suggest that net private capital flows to the Emerging Market Economies (EMEs), which had recovered in the second quarter of 2009, gained pace in the third quarter; 30 EMEs are projected to receive US$ 349 billion in 2009. This, however, will still be only about one fourth of the peak level of net flows received in 2007.
Outlook: Indian Economy
In India, GDP growth in the first quarter of 2009-10 at 6.1 per cent represents a modest recovery over the 5.8 per cent growth recorded during the preceding two quarters in the second half of 2008-09. In comparison to the high average growth of 8.8 per cent recorded during the five-year period 2003-08, however, the first quarter growth in 2009-10 still points to persistence of slowdown.
Information available on various lead indicators in the second quarter of 2009-10 suggests that because of deficient monsoon, kharif output may be adversely affected.
Industrial sector has started exhibiting recovery, with 5.8 per cent growth during April-August 2009, as compared with 4.8 per cent during the corresponding period of the previous year.
Growth in core infrastructure witnessed notable acceleration in August 2009, and for April-August 2009 it was higher at 4.8 per cent as against 3.3 per cent during the corresponding period of the previous year.
Lead indicators for services suggest pick up in activities relating to construction and telecommunication, even though external demand dependent services, such as, tourism and cargo handled at ports, continue to be depressed.
Deceleration in aggregate demand that was witnessed in the second half of 2008-09 continued during 2009-10. Growth in private consumption demand fell to as low as 1.6 per cent in the first quarter of 2009-10. Investment demand also decelerated further, and the high growth in government consumption demand that was witnessed in the last two quarters of 2008-09 moderated.
Corporate performance data indicate that growth in sales declined in the first quarter of 2009-10, though profitability showed improvements.
Deficient monsoon and the associated drought like conditions in several parts of the country, and the more recent floods in some other parts, could also dampen rural demand.
Given the predominant role of domestic demand in conditioning the growth outlook in India, weak private consumption and investment demand continue to impede faster recovery.
Reflecting the continuation of the expansionary fiscal response to the growth slowdown, key deficit indicators of the Central Government, viz., revenue deficit and gross fiscal deficit were significantly higher during April-August, 2009 over the corresponding period of the previous year. Slowdown induced decline in revenue receipts, though, partly contributed to this trend.
External demand continues to be weak. Trade data show that during April-August 2009, merchandise exports and imports declined by 31.0 per cent and 33.4 per cent, respectively, over the corresponding period of the previous year.
On a balance of payments basis, during the first quarter of 2009-10 while exports declined, imports increased over the preceding quarter, primarily reflecting higher oil prices, resulting in a higher trade deficit. The surplus in net invisibles, led by buoyant remittance inflows financed close to 78 per cent of the trade deficit.
The current account, thus, remained in deficit of about US$ 5.8 billion. Reflecting India’s resilience to the crisis in 2008-09 and the growth prospects of the economy, capital flows, which had turned negative in the last two quarters of 2008-09, reversed in the first quarter. This ensured financing of current account deficit without any recourse to foreign exchange reserves.
The rebound in capital inflows persisted through the second quarter of 2009-10. Including valuation gains on foreign exchange reserves and the SDRs allocated by the IMF to India, India’s foreign exchange reserves increased by US$ 32.8 billion during 2009-10 (up to October 16, 2009) to a level of US$ 284.8 billion.
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