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Macroeconomic and Monetary Developments: First Quarter 2008-09
-Announced on the 28th July 2008

The Reserve Bank on 28th July 2008 released the document “Macroeconomic and Monetary Developments: First Quarter Review 2008-09” to serve as a backdrop to the First Quarter Review of Annual Policy Statement for 2008-09 being announced on July 29, 2008.

The highlights of this Review are:

The Real Economy

According to the revised estimates released by the Central Statistical Organisation (CSO) in May 2008, the real GDP growth was placed at 9.0 per cent during 2007-08 as compared with 9.6 per cent in 2006-07. The deceleration in growth was on account of industry and services, offset partly by recovery in agriculture.

According to the Fourth Advance Estimates, the foodgrains production during 2007-08 was placed at an all-time high of 230.7 million tonnes, exhibiting an increase of 6.2 per cent over the previous year (217.3 million tonnes) predominantly on account of kharif foodgrains production. Barring sugarcane, all foodgrains and non-foodgrains are estimated to reach an all-time record production during 2007-08.

During April-May 2008 the index of industrial production recorded year-on-year expansion of 5.0 per cent as compared with 10.9 per cent during April-May 2007. The manufacturing sector recorded growth of 5.3 per cent during April-May 2008 (11.8 per cent during April-May 2007), while the electricity sector recorded growth of 1.7 per cent (9.0 per cent during April-May 2007).

The infrastructure sector recorded growth of 3.5 per cent during April-May 2008 (6.9 per cent during April-May 2007), reflecting deceleration in all the sectors, except coal and crude petroleum.

Available information on the leading indicators of services sector activity during 2008-09 so far suggest acceleration in growth in respect of some indicators such as railway revenue earning freight traffic, tourist arrivals and export cargo handled by civil aviation as compared with corresponding period of 2007-08. On the other hand, growth decelerated in respect of cargo handled at major ports, various indicators of civil aviation, excluding export cargo and commercial vehicles production.

Fiscal Situation

Available information on Central Government finances during April-May 2008 indicates that revenue deficit and gross fiscal deficit were higher than a year ago, both in absolute terms and as proportion to budget estimates. Gross primary deficit in April-May 2008 was also higher than a year ago. The widening of fiscal deficit of the Central Government during April-May 2008 was mainly on account of a sharp rise in plan expenditure over April-May 2007. On the other hand, non-plan expenditure was contained mainly due to moderation in the growth of interest payments and major subsidies, and decline in defence expenditure.

Gross and net market borrowings (dated securities and 364-day Treasury Bills) of the Central Government during 2008-09 (up to July 18, 2008) amounted to Rs.77,809 crore and Rs.42,819 crore, respectively, accounting for 44.3 per cent and 43.3 per cent, respectively, of the estimated market borrowings for the year. During the corresponding period of the previous year, gross and net borrowings accounted for 40.5 per cent and 33.5 per cent, respectively.

The cash balance of the Central Government remained in surplus during 2008-09 (up to July 18, 2008). The surplus cash balance of the Central Government as on July 18, 2008 was Rs. 19,767 crore.

During the current year so far (up to July 18, 2008), eight State Governments raised Rs.8,712 crore (14.8 per cent of gross allocation for the year) through auctions with a cut-off yield in the range 8.39-9.81 per cent as compared with Rs.7,153 crore by 13 State Governments (cut-off yield ranging from 8.30-8.57 per cent) during the corresponding period of the previous year.

The average daily utilisation of WMA and overdraft by the States during 2008-09 (up to July 18, 2008) was Rs.351 crore as compared with Rs. 736 crore during the corresponding period of 2007-08.

The average investments by the States in Treasury Bills during 2008-09 (up to July 18, 2008) amounted to Rs. 81,750 crore as compared with Rs. 70,608 crore during the corresponding period of 2007-08.

Monetary and Liquidity Conditions

Growth in broad money (M3), year-on-year (y-o-y), was 20.5 per cent (Rs. 7,04,046 crore) on July 4, 2008 as compared with 21.8 per cent (Rs. 6,17,118 crore) a year ago.

Aggregate deposits of banks, y-o-y, expanded by 20.7 per cent (Rs.6,07,668 crore) on July 4, 2008 as compared with 23.1 per cent (Rs. 5,50,653 crore) a year ago.

Non-food credit by scheduled commercial banks (SCBs) expanded by 25.9 per cent (Rs.4,85,709 crore), y-o-y, as on July 4, 2008 as compared with 24.6 per cent (Rs.3,69,109 crore) a year ago.

Growth in reserve money, y-o-y, was 26.5 per cent on July 18, 2008 as compared with 29.0 per cent a year ago. Adjusted for the first round impact of the hike in the cash reserve ratio, reserve money growth was 18.4 per cent as compared with 21.6 per cent a year ago.

Liquidity conditions continued to be influenced by movements in cash balances of the Central Government and capital flows. The Reserve Bank continued with the policy of active management of liquidity through appropriate use of cash reserve ratio (CRR) and open market operations (OMO), including MSS and LAF and other policy instruments at its command flexibly.

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