Annual Policy Statement for the Year 2009-10
-Announced on the 21st April 2009 by Dr. Y.Venugopal Reddy, Governor, Reserve Bank of India
This annual policy statement for 2009-10 is set in the context of exceptionally challenging circumstances in the global economy. The crisis has called into question several fundamental assumptions and beliefs governing economic resilience and financial stability. What started off as turmoil in the financial sector of the advanced economies has snowballed into the deepest and most widespread financial and economic crisis of the last 60 years. With all the advanced economies in a synchronised recession, global GDP is projected to contract for the first time since the World War II, anywhere between 0.5 and 1.0 per cent, according to the March 2009 forecast of the International Monetary Fund (IMF). The World Trade Organisation (WTO) has forecast that global trade volume will contract by 9.0 per cent in 2009.
2.Governments and central banks around the world have responded to the crisis through both conventional and unconventional fiscal and monetary measures. These measures have been criticised for their size, timing, sequencing and design as also, more importantly, for their economic and ideological underpinnings. The most voluble criticism has been that ‘purely national responses’ are inadequate to address a virulent global crisis. In recognition of a pressing need for global co-ordination and co-operation, particularly in order to inspire the trust and confidence of economic agents around the world, leaders of the G-20 group of nations met twice in the last six months. At their recent meeting in early April 2009, the G-20 leaders collectively committed to take decisive, co-ordinated and comprehensive actions to revive growth, restore stability of the financial system, restart the impaired credit markets and rebuild confidence in financial markets and institutions.
3.Despite some apprehensions prior to the meeting, the overall impact of the G-20 meeting in managing market perceptions has been positive. Even so, the global financial situation remains uncertain and the global economy continues to cause anxiety for several reasons. There is as yet no clear estimate of the quantum of tainted assets, and doubts persist on whether the initiatives underway are sufficient to restore the stability of the financial system. There is continued debate on the adequacy of the fiscal stimulus packages across countries, and their effectiveness in arresting the downturn, reversing job losses and reviving consumer confidence. Many major central banks have nearly or totally exhausted their conventional weaponry of calibrating policy interest rates and are now resorting to unconventional measures such as quantitative and credit easing. Given the erosion of the monetary policy transmission mechanism, there are concerns about when and to what extent monetary response, admittedly aggressive, will begin to have an impact on reviving credit flows and spurring aggregate demand.
4.Like all emerging economies, India too has been impacted by the crisis, and by much more than what was expected earlier. The extent of impact has caused dismay, mainly on two grounds: first, because our financial sector remains healthy, has had no direct exposure to tainted assets and its off-balance sheet activities have been limited; and second, because India’s merchandise exports, at less than 15 per cent of GDP, are relatively modest. Despite these mitigating factors, the impact of the crisis on India evidences the force of globalisation as also India’s growing two-way trade in goods and services and financial integration with the rest of the world.
5.After clocking annual growth of 8.9 per cent on an average over the last five years (2003-08), India was headed for a cyclical downturn in 2008-09. But the growth moderation has been much sharper because of the negative impact of the crisis. In fact, in the first two quarters of 2008-09, the growth slowdown was quite modest; the full impact of the crisis began to be felt post-Lehman in the third quarter, which recorded a sharp downturn in growth. The services sector, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms for five months in a row during October 2008-February 2009. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. Dampened demand has dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. The index of industrial production (IIP) has been nearly stagnant in the last five months (October 2008 to February 2009), of which two months registered negative growth. Investment demand has also decelerated. All these indicators suggest that growth will moderate more than what had been expected earlier.
6.Despite the adverse impact as noted above, there are several comforting factors that have helped India weather the crisis. First, our financial markets, particularly our banks, have continued to function normally. Second, India’s comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows. Third, headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate. Fourth, because of mandated agricultural lending and social safety-net programmes, rural demand continues to be robust.
7.Both the Government and the Reserve Bank responded to the challenge of minimising the impact of crisis on India in co-ordination and consultation. The Reserve Bank shifted its policy stance from monetary tightening in response to the elevated inflationary pressures in the first half of 2008-09 to monetary easing in response to easing inflationary pressures and moderation of growth engendered by the crisis. The Reserve Bank’s policy response was aimed at containing the contagion from the global financial crisis while maintaining comfortable domestic and forex liquidity. Taking a cue from the Reserve Bank’s monetary easing, most banks have reduced their deposit and lending rates.
8. The Central Government launched three fiscal stimulus packages during December 2008-February 2009. These stimulus packages came on top of an already announced expanded safety-net programme for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission report, all of which too added to stimulating demand.
Click Here For Highlights of Annual Policy Statement for the Year 2009-10
Click Here For Macro economic and Monetary Developments : 2008-09