Indian economy poised for great heights, says Economic Survey

Robust growth and steady fiscal consolidation have been the hallmark of the Indian economy in the year 2010-11 so far. The growth rate has been 8.6 percent in 2010-11 and is expected to be around 9 percent in the next fiscal year. The growth has been broad based with a rebound in the Agriculture sector which is expected to grow around 5.4 per cent. Manufacturing and Services sector have registered impressive gains. Savings and investment are looking up while exports are rising. However food inflation, higher commodity prices and volatility in global commodity markets have been a cause of concern underscoring the need of fiscal consolidation and stronger reserves. These are some of the high points of the Economic Survey 2010-11, presented by the Finance Minister Shri Pranab Mukherjee in Lok Sabha today.

Recognizing the fact that inflation continues to be high even though it has come down markedly from where it was at the start of the fiscal year, the Survey underlined the need to monitor emerging trends in inflation on a sequential monthly basis. In order to check food inflation, it has suggested, the Government should improve the delivery mechanisms by strengthening the institutions and addressing corruption. The survey has pointed out that the inflation is expected to be 1.5 percent higher than what would be if the country was not on the growth curve.

The Survey has observed that a rise in savings and investments and pick up in private consumption has resulted in 9.7 per cent growth of GDP at market prices (constant) in 2010-11.Savings rate has gone up to 33.7 percent while the investment rate is up to 36.5 percent of GDP in 2009-10.

The Survey points out that the agriculture sector growth in the first four years of the 11th Plan (2007-12) is estimated at 2.87 per cent. The foodgrain production went up to 232.1 billion tonnes from 218.1 billion tonnes in 2009-10. With a relatively good monsoon the agriculture-sector is expected to grow at 5.4 per cent during 2010-11. The rising food inflation and the critical role of agriculture underline the need for a larger investment in agriculture enroute to the second green revolution.

The Survey reports that the industrial output growth rate was 8.6 per cent while the manufacturing sector registered a growth rate of 9.1 per cent in 2010-11. During April-November 2010 telecom, crude oil production, civil aviation sectors performed well while the power generation, cement and fertilizer production, railway freight traffic and cargo handling at major ports have grown at comparatively lower rates. Six core industries registered a growth of 5.3 per cent (provisional) in April-December, 2010 as against 4.7 per cent during the same period in 2009-10.

Economic Survey 2010-11 has highlighted the increasing role of infrastructure services which have been deepening rapidly with rising investments. However unmet gaps still remains large and accelerated investments will be needed in the next Plan period for addressing delays, cost overruns and regulatory and pricing impediments. The telecommunications sector has done exceedingly well as the tele density has increased from 20.74 per cent in 2004 to 143.95 per cent in 2010 in urban areas. While in the rural areas it has gone up from 1.57 per cent in 2004 to 30.18 per cent in 2010.

Lauding the role of services sector as the potential growth engine, the Survey has called for the policies to promote further opportunities in new areas in global demand such as accounting, legal, tourism, education, financial and other services beyond the IT and business process sectors.

The Survey points out that the exports in April-December 2010 went up by 29.5 per cent while the imports during the same period registered a growth rate of 19 per cent. The trade gap narrowed down to US $ 82.01 bn in the same period. Balance of payment situation has improved due to surge in capital flows and rise in foreign exchange reserves which have been accompanied by rupee appreciation. During current fiscal foreign exchange reserves increased by US $ 18.2bn from US $ 279.4 bn in end April 2010 to US $ 297.3 bn in end December 2010.

The inclusive growth agenda of the Government is reflected in the 59 per cent rise in Net Bank Credit . The expenditure on Social sector programs has been stepped up by 5 percent point of GDP over the past five years.

The Survey points out that Gross Fiscal Deficit is 4.8% of GDP in 2010-11 as against 6.3 percent of GDP in the previous year. The Revenue deficit in the current financial year has been 3.5 percent of GDP as against 5.1 percent in the previous year.

The Economic Survey 2010-11 has expressed satisfaction at the progress of fiscal consolidation and the role of monetary policy on tackling inflation, ensuring availability of funds and expansion of credit growth. It has called for efficient taxation of goods and services by a new GST, raising revenues, installing stronger safeguards and measures to accelerate financial inclusion.

The Economic Survey 2010-11 has lauded the Government’s efforts in addressing social and financial inclusion. The specific schemes for Scheduled Castes, Tribes, OBCs and the regions such as North-East, expansion of Mahatma Gandhi NREGA, Sarva Shiksha Abhiyan , National Rural Health Mission, in terms of coverage as well as the spending and monitoring have found specific mention in the report. The survey has advised that a better convergence of the schemes to address the issues of unemployment and poverty alleviation could avoid duplication and leakages.

A call for reforms in the university and higher education and correcting the demand supply mismatch in the job market has been made in the report. It says the gap in resources for higher education may be met on the basis of public private partnership without diluting the regulatory oversight of the Government.

The Survey has also made specific mention of Government’s active engagement on issues related to climate change with expanded financing of programs and better policies.

The Economic Survey has suggested that in the long run the potential engines of growth for the country could be from skill development and innovative activity and therefore, efforts should be made to promote them.

Regarding the outlook for the Indian economy, the Survey says that despite the risks of global events, such as volatility in commodity prices like crude oil exacerbated by political turmoil in the Middle-East, the Indian economy seems poised to scale greater heights in terms of macro economic indicators. It sums up by stating that the real GDP growth is expected to reach the 9 per cent mark in 2011-12 and the next two decades may well see the economy growing faster than it has done any time in the past. (PIB)

Early signs of recovery visible, says FM

The Finance Minister Pranab Mukherjee has said that global economy has started stabilizing and early signs of revival of the Indian economy are visible though delayed monsoons have cast a shadow on agricultural growth.

The Finance Minister opined this while inaugurating the 25th Annual Conference of Chief Commissioners and Directors General of Income Tax here today. Addressing the Conference he said that India, along with China, is being looked upon by the entire world as the engine for global economic recovery. Central revenues play a pivotal role in ensuring rapid economic development and inclusive growth by providing much-needed resources. As direct taxes have become the major source of central revenue, its role has, accordingly, increased in shaping the economic future of India, he said.

The Finance Minister emphasised that tax laws should be simple, stable and robust. Tax rates should remain moderate and multiplicity of taxes, tax exemptions and deductions should be gradually phased out to improve tax compliance.

The Finance Minister informed that the government is taking a major step forward in direct tax reforms by formulating a new Direct Taxes Code, to be put in the public domain tomorrow. While drafting this Code, the best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. FM exhorted the Officers to go through the draft and give their views and suggestions to enable the department to finalise the document for taking it to the Parliament in its Winter Session.

Mukherjee said that direct tax collections have grown at an average annual rate of 26.8 per cent in the last five years, and have more than trebled from Rs.1,05,088 crore in financial year 2003-04 to Rs.3,38,212 crore in financial year 2008-09 increasing its share from 3.81 per cent to 6.21 per cent of the Gross Domestic Product (GDP). This impressive growth has been made possible by improvement in tax administration as well as better tax compliance, he added.

The Finance Minister said that for the current financial year, the direct tax collection target has been fixed in the Budget Estimates at Rs.3,70,000 crore at a growth of 9.4 per cent over the actual collection last year. “Given the likely impact on government finances due to unanticipated drought, I will like to suggest a further upward revision in the direct tax collection target to Rs.4,00,000 crore. I know what I am asking you to achieve is an extremely challenging target given the current economic situation. But it is equally true that if such a target has to be achieved, it can only be done by the Direct Tax. Tax base in India is still small and there is still substantial tax evasion or underpayment of taxes. The tax-net, therefore needs to be deepened further”, said Mukherjee.

The Finance Minister said that in the last few years, the Income tax department has made significant progress in developing infrastructure. The National Computer Network of the department has become functional after data from 36 Regional Computer Centres was seamlessly migrated last year. This is a unique exercise of its kind in the world, he said.

The Finance Minister applauded the department for taking several other initiatives to improve taxpayer services, including facilities of electronic payment of taxes. Last year, nearly a sixth of the total tax returns were filed electronically, and nearly two-thirds of the gross taxes were paid electronically. A Centralised Processing Centre has become operational at Bangalore and is likely to further speed up processing of returns and issue of refunds to taxpayers. The Refund Banker Scheme functional in six cities presently ensures that taxpayers get their refunds quickly and directly into their bank accounts. Large taxpayer Units, operational in four cities, have received good response. The department is in the process of implementing the ‘Sevottam’ scheme to deliver customer-oriented services, added Mukherjee.

Good Times are coming back

Hope, confidence and optimism on the Indian economy front

by Ashok Handoo

Finally, the country has managed to record a 6.7 percent growth in financial year 2008-09, despite the global economy still in the throes of a deep recession. This has been vindicated by the official figures released recently. This growth rate, though, much lower than the 9 percent rate that we have been clocking for the previous four years, is nonetheless, well above the 6 percent growth that was being projected by some analysts. Some prophets had even predicted only a 5% growth in the last financial year. The Central Statistical Organization had pegged the GDP growth rate at 7.1 percent.

The actual growth rate is certainly in the range that the RBI had projected: 6 to 5.7 %. Our Prime Minister Dr. Manmohan Singh too had been emphasizing that the growth rate would be in the range of 6.5 to 7. That is precisely what has happened.

In a way, this growth has been somewhat unexpected. It has largely been possible by the strong 5.8 % growth in the last quarter of the financial year. The reasons for this have been the effects of huge Government spending on social programmes and construction, pumping liquidity into the market through special packages and by lowering of interest rates. Government consumption too increased by 22 percent.

The most encouraging news is the performance of the core sector which has sent clear signals of an economic recovery. In April 2009 growth rate in the core sector of infrastructure doubled to 4.3 percent, against 2.3% in the same month last year when the economy was booming. The output of cement in April went up by 11.7% compared to 6.9% in the same month last year. Steel grew by 1.6 percent against a decline of 0.6 % in April last year. Coal production grew at an impressive 13.2 percent compared to 10.4 % in the corresponding period last year. So was the case with electricity generation which jumped up by 6% in April against 1.4 % in the same month, last year.

Not less important is the increase in the collection of direct taxes by 16.88 % in May this year. In fact the collections have shown a positive growth since February this year. This will help the Government to keep the fiscal deficit under control, which could well cross 5% of the GDP against the limit of 2.5 % fixed earlier. The deficit could well be about 10 % if the state budgets are also taken into account. The actual position in this regard will, however, be known when the Finance Minister presents the budget next month. May month’s collection figures are particularly encouraging as there had been a shortfall just a month earlier.

As a result of this economic scenario, coupled with the installation of a stable Government at the centre, the financial market is also jubilant. The stocks are rising and the sensex is hovering in the 15,000 area, double than what it was less than 6 months ago. Mutual Funds too are, as a consequence, looking up.

The picture certainly would have been much better, had we not slowed down in two important sectors: manufacturing and agriculture. A sluggish manufacturing sector, which grew at just 2.4 percent during 2008-09 against 8.2% in the previous financial year, was a dampener. Similarly, agriculture, which accounts for 20 % of the country’s GDP, recorded just 1.6 % growth in the last financial year against 4.9 % in the previous financial year.

What came as a booster was the growth in the service sector: 13 % growth in the community services, 9% in transport and communications sector and a 7.8% growth in financial and other service sector. All this happened at a time when the US economy contracted by an annualized rate of 6.2 % and the Japanese economy by 12.7 %. This only proves the resilience of Indian economy. To some extent it is also due to the fact that Indian economy is more inward looking as it opened up only after 1991. It thus depends more on the domestic demand. In sectors where it looks more on the foreign markets like the textiles, the effect of global meltdown has been more pronounced. The country recorded a 33% fall in exports in March this year, leading to fall in incomes and unemployment in this sector.

President Pratiba Devi Singh Patil’s recent address to the joint sitting of the two houses of Parliament has now laid the future roadmap for the Government. It aims at pushing ahead with the economic reforms, pursuing the disinvestment and promoting Foreign Direct Investment which will also take care of the financial constraints of the Government. It also envisages increased public spending. But while doing so, care will be taken of fiscal prudence so that the widening gap in fiscal deficit is kept in check. Liquidity in the banking sector will also be improved to make way for better access to funds by the stake holders. The Reserve Bank of India has already asked the Government for a comprehensive review of the interest rate regime to nudge the banks into reducing their lending rates which they are reluctant to do. The Finance Minister Mr. Pranab Mukherjee too has clearly pointed out to the banks that they have not so far adequately reflected in their lending rates, the reduction in key rates by the RBI. But they have now agreed to take a fresh look at the issue.

Fortunately, inflation too is under control which provides additional leg space to the Government to take fiscal and monetary measures to push up growth. The current financial year will not be without challenges and the growth rate may continue to be around the existing level. The Prime Minister told the Parliament the other day that he was confident that the country would record at least 7% growth in the current fiscal as well. But if all work together, it is possible to raise it to 8-9 % “even when the world grows at a lower rate” the Prime Minister said. These are words of satisfaction indeed. A high rate of 35% of our GDP being the savings determines the money that can be deployed for development works, though heavy public spending does carry a cost in terms of increasing fiscal deficit which has already crossed 6.2 %.

The larger picture that emerges thus is of hope, confidence and optimism on the economic front.

RBI not very optimistic in Q3 review

The Reserve Bank has released the document “Macroeconomic and Monetary Developments Third Quarter Review 2008-09” to serve as a backdrop to the Third Quarter Review of Monetary Policy 2008-09.

The highlights of macroeconomic and monetary developments during 2008-09 so far are:

Overview

The Indian economy, after exhibiting strong growth during the second quarter of 2008-09, has experienced moderation in the wake of the global economic slowdown. Although agricultural outlook remains satisfactory, industrial growth has decelerated sharply and services sector is slowing. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand.


The balance of payments (BoP) for the first half of 2008-09 reflected a widening of the current account deficit and moderation in capital flows. Net capital inflows reduced sharply and remained volatile during 2008-09 with foreign direct investment inflows showing an increase, while portfolio investments recording a substantial outflow.


The growth of non-food credit remained high during 2008-09, so far, albeit with some moderation in recent months. Continued high growth in time deposits enabled the banking system to sustain the credit expansion while the non-banking sources of funds to the commercial sector declined.


The total flow of resources from banks and other sources to the commercial sector during 2008-09, so far, has been somewhat lower than the comparable period of 2007-08.


Financial markets in India, which, by and large, remained orderly from April 2008 to mid-September 2008, witnessed heightened volatility subsequently reflecting the knock-on effects of the disruptions in the international financial markets and the uncertainty that followed. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards. Liquidity conditions turned around and became comfortable from mid-November 2008.


Headline inflation has declined in major economies since July/August 2008. In India, inflation measured as year-on-year variation in the wholesale price index (WPI) has declined sharply since August 2008 and was at 5.6 per cent as of January 10, 2009.


On the macroeconomic front, the downside risks for economic growth emanate from global economic slowdown, deterioration in global financial markets and slowing down in domestic demand. On the positive side, factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure. The easing of international oil prices and commodity prices may help in softening the inflationary pressure.


Output

According to estimates released by the Central Statistical Organisation (CSO) in November 2008, the real GDP growth was placed at 7.6 per cent during the second quarter of 2008-09 as compared with 9.3 per cent during the corresponding quarter of 2007-08, reflecting deceleration in growth of industry and services.


The Ministry of Agriculture has set a target for foodgrains production for 2008-09 at 233.0 million tonnes. According to the First Advance Estimates, the kharif foodgrains production during 2008-09 was placed at 115.3 million tonnes (Fourth Advance Estimates) as compared with that of 121.0 million tonnes during the previous year.


The index of industrial production during April-November 2008-09 recorded year-on-year expansion of 3.9 per cent as compared with 9.2 per cent during April-November 2007-08. The manufacturing sector recorded growth of 4.0 per cent during April-November 2008-09 (9.8 per cent during April-November 2007-08) and the electricity sector recorded growth of 2.9 per cent (7.0 per cent during April-November 2007-08).


Available information on the leading indicators of services sector activity during April-October 2008-09 indicate some acceleration in growth in respect of several indicators such as railway revenue earning and freight traffic and export cargo handled by civil aviation as compared with the corresponding period of 2007-08. On the other hand, growth decelerated in respect of cargo handled at major ports and other indicators of civil aviation excluding export cargo, commercial vehicles, cement and steel.


Aggregate Demand

Aggregate demand in the Indian economy is primarily domestically driven, though exports have been gaining progressively higher importance in recent years. The economic slowdown, during the second quarter vis-à-vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and widening of trade deficit, offset partially by an acceleration in investment demand. On the other hand, the government consumption expenditure accelerated during the same period.


According to the latest information on Central Government finances for 2008-09 (April-November), the revenue deficit and fiscal deficit were placed higher than those in April-November 2007 both in absolute terms and as per cent of budget estimates (BE) primarily on account of higher revenue expenditure.


Tax revenue as per cent of BE was lower than a year ago on account of lower growth in income tax, corporation tax and customs duties owing to economic slowdown. Aggregate expenditure as per cent of BE, was higher than a year ago on account of higher revenue expenditure, particularly, subsidies, defence, other economic services, social services and plan grants to States/Union Territories.


While expenditure is slated to increase on account of the fiscal stimulus measures undertaken by the Government to address the problem of economic slowdown, growth of tax revenue is likely to decelerate in the coming months of 2008-09 due to moderation in economic activity. The net cash outgo on account of the two supplementary demand for grants is placed at Rs. 1,48,093 crore. This, in turn, will be reflected in the non-attainability of the deficit targets for 2008-09 as envisaged in the Union Budget 2008-09.


During 2008-09 (up to January 13, 2009), special bonds amounting to Rs.44,000 crore and Rs.14,000 crore have been issued to oil marketing companies and fertiliser companies, respectively.


Sales performance of select non-Government non-financial public limited companies in the private corporate sector during the first two quarters of 2008-09 was impressive; however, profits performance was subdued as compared with 2007-08. Higher increase in expenditure in relation to sales growth was primarily on account of rising input costs, interest expenses and large provisioning towards mark to market (MTM) losses on foreign exchange related transactions which exerted pressure on profits.

The External Economy

India’s balance of payments position during the first half of 2008-09 (April-September) reflected a widening of trade deficit resulting in large current account deficit, and moderation in capital flows. Merchandise trade deficit recorded a sharp increase during April-November 2008 on account of higher crude oil prices for most of the period and loss of momentum in exports since September 2008. Net surplus under invisibles remained buoyant, led by increase in software exports and private transfers. Net capital inflows reduced sharply and have remained volatile during 2008-09 so far.
The large increase in merchandise trade deficit during April-September 2008 led to a significant increase in the current account deficit over its level during April-September 2007. The widening of trade deficit during April-September 2008 could be attributed to higher import payments reflecting high international commodity prices, particularly crude oil prices.


The surplus in the capital account moderated during April-September 2008 reflecting increased gross capital outflows on the back of global financial turmoil. While the net inward FDI (net direct investment by foreign investors) remained buoyant reflecting relatively strong fundamentals of the Indian economy and continuing liberalisation measures to attract FDI, net outward FDI (net direct investment by Indian investors abroad) also remained high during April-September 2008. The gross capital inflows were higher on account of higher FDI inflows and NRI deposits during the period.


In terms of residual maturity, the revised short-term debt (below one year) comprising sovereign debt, commercial borrowings, NRI deposits, short-term trade credit and others maturing up to March 2009, was estimated at around US $ 85 billion as at end-March 2008.


According to the provisional data released by DGCI&S, India’s merchandise exports during April-November 2008 increased by 18.7 per cent while imports recorded a higher growth of 32.5 per cent, largely due to the rise in petroleum, oil and lubricants (POL) imports. The rise in oil imports was primarily due to the elevated international crude oil prices, while the volume of oil imports moderated. Merchandise trade deficit during April-November 2008 widened to US $ 84.4 billion from US $ 53.2 billion a year ago.


As of January 16, 2009, foreign exchange reserves at US $ 252.2 billion declined by US $ 57.5 billion over the level at end-March 2008, including changes due to valuation losses.


Monetary Conditions

Monetary and liquidity aggregates that expanded at a strong pace during the first half of 2008-09 showed some moderation during the third quarter reflecting the decline in capital flows and consequent foreign exchange intervention by the Reserve Bank.


Growth in broad money (M3), year-on-year (y-o-y), was 19.6 per cent (Rs. 7,36,777 crore) on January 2, 2009 lower than 22.6 per cent (Rs. 6,91,768 crore) a year ago.


Aggregate deposits of banks, y-o-y, expanded 20.2 per cent (Rs.6,49,152 crore) on January 2, 2009 as compared with 24.0 per cent (Rs. 6,21,944 crore) a year ago.


The growth in bank credit continued to remain high. Non-food credit by scheduled commercial banks (SCBs) was 23.9 per cent (Rs.5,01,645 crore), y-o-y, as on January 2, 2009 from 22.0 per cent (Rs.3,79,655 crore) a year ago.


The intensification of global financial turmoil and its knock-on effect on the domestic financial market, and downturn in headline inflation, necessitated the Reserve Bank to ease its monetary policy since mid-September 2008.


Reserve money growth at 6.6 per cent, y-o-y, as on January 16, 2009 was much lower than that of 30.6 per cent a year ago. Adjusted for the first round effect of the changes in CRR, reserve money growth was 18.0 per cent as compared with 21.6 per cent a year ago.


Financial Markets

The crisis in global financial markets deepened since mid-September 2008, triggered by the collapse of Lehman Brothers followed by the failure of a number of other financial firms across countries. The pressure on financial markets mounted with the credit spreads widening to record levels and equity prices crashing to historic lows leading to widespread volatility across the market spectrum. The turmoil transcended from credit and money markets to the global financial system more broadly. The contagion also spilled over to the emerging markets, which saw broad-based asset price declines amidst depressed levels of risk appetite.


Added to this, there was a significant deterioration in the global economic outlook. As a result, authorities in several countries embarked upon an unprecedented wave of policy initiatives to contain systemic risk, arrest the plunge in asset prices and shore up the confidence in the international banking system. While these initiatives did help in restoring some level of stability, the financial market conditions remained far from normal during the period October-December 2008.


Liquidity conditions tightened significantly in India between mid-September and October 2008 emanating from adverse international developments and some domestic factors.Financial markets in India came under pressure since mid-September 2008, reflecting the knock-on effects of the disruptions in the international financial markets. This necessitated the Reserve Bank to undertake a series of measures to inject rupee and foreign exchange liquidity from mid-September 2008 onwards.


Accordingly, money markets in India came under some pressure mirroring the impact of capital outflows and redemption pressures faced by mutual funds and other investors. The pressure on money markets was reflected in call rates breaching the upper bound of Liquidity Adjustment Facility (LAF) corridor but settling back within the corridor by November 2008. Interest rates in the collateralised segments of the money market moved in tandem with but remained below the call rate during the third quarter of 2008-09.


In the credit market, lending rates of scheduled commercial banks, which had increased initially, started declining in December 2008. Yields in the government securities market also came to soften during the third quarter 2008-09.


In the foreign exchange market, Indian rupee generally depreciated against major currencies. Indian equity markets witnessed downswings quite in line with trends in major international equity markets.


The Reserve Bank swiftly initiated a series of measures, which helped to assuage liquidity conditions, while reassuring the market that the Indian banking system continued to be safe and sound, well capitalised and well regulated.


Price Situation

The accommodative monetary policy, which was pursued by most central banks since September 2008, aimed at mitigating the adverse implications of the recent financial market crisis on economic growth and employment.


Headline inflation moderated in major economies since July/August 2008 on account of the marked decline in international energy and commodity prices as well as slowdown in aggregate demand emerging from the persistence of financial market turmoil following the US sub-prime crisis.


After remaining at elevated levels for an extended period, global commodity prices declined sharply since the second quarter of 2008-09 led by decline in the prices of crude oil, metals and food. The WTI crude oil prices have eased from its historical high of US $ 145.3 a barrel level on July 3, 2008 to around US $ 42.3 a barrel as on January 22, 2009 reflecting falling demand in the Organisation for Economic Co-operation and Development (OECD) countries as well as some developing countries, notably in Asia, following the economic slowdown. Metal prices eased further during the third quarter of 2008-09, reflecting weak construction demand in OECD countries and some improvement in supply, especially in China.


In India inflation, based on the year-on-year changes in wholesale price index (WPI), declined sharply from an intra-year peak of 12.9 per cent on August 2, 2008 to 5.6 per cent as on January 10, 2009. The recent decline in WPI inflation was driven by decline in prices of minerals oil, iron and steel, oilseeds, edible oils, oil cakes, raw cotton.


Amongst major groups, primary articles inflation, year-on-year, increased to 11.6 per cent on January 10, 2009 from 4.5 per cent a year ago and (it was 9.7 per cent at end-March 2008). This mainly reflected increase in the prices of food articles, especially of wheat, fruits, milk, and eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton.
The fuel group inflation turned negative (-1.3 per cent) as on January 10, 2009 as compared to an intra-year peak of 18.0 per cent on August 2, 2008. This reflected the reduction in the price of petrol by Rs. 5 per litre and diesel by Rs. 2 per litre effective December 6, 2008 as well as decline in the prices of freely priced petroleum products in the range of 30-65 per cent since August 2008.


Manufactured products inflation, year-on-year, also moderated to 5.9 per cent on January 10, 2009 as compared with the peak of 11.9 per cent in mid-August 2008 but remained higher than 4.6 per cent a year ago. The year-on-year increase in manufactured products prices was mainly driven by sugar, edible oils/oil cakes, textiles, chemicals, iron and steel and machinery and machine tools.


Inflation, based on year-on-year variation in consumer price indices (CPIs), increased further during November/December 2008 mainly due to increase in the prices of food, fuel and services (represented by the ‘miscellaneous’ group). Various measures of consumer price inflation were placed in the range of 10.4-11.1 per cent during November/December 2008 as compared with 7.3-8.8 per cent in June 2008 and 5.1-6.2 per cent in November 2007.


Macroeconomic Outlook

The various business expectations surveys released recently reflect less than optimistic sentiments prevailing in the economy. The results of Professional Forecasters’ Survey conducted by the Reserve Bank in December 2008 also suggested further moderation in economic activity for 2008-09.


According to the Reserve Bank’s Industrial Outlook Survey of manufacturing companies in the private sector, the business expectations indices based on assessment for October-December 2008 and on expectations for January-March 2009 declined by 2.6 per cent and 5.9 per cent, respectively, over the corresponding previous quarters.


The global economic outlook has deteriorated sharply since September 2008 with several countries, notably the US, the UK, the Euro area and Japan experiencing recession. In India too, there is evidence of a slowing down of economic activity. Unlike in the advanced countries where the contagion of crisis spread from the financial to the real sector, in India the slowdown in the real sector is affecting the financial sector, which in turn, has a second-order impact on the real sector.


On the positive side factors include expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay Commission awards, debt waiver for farmers and pre-election expenditure.
WPI inflation has fallen sharply driven by falling international commodity prices especially those of crude oil, steel and selected food items, although, some contribution has also come from the slowing domestic demand. Going forward, the outlook on international commodity prices indicate further softening of domestic prices.

Impact of Global Meltdown: Painful year ahead

by Ashok Handoo

With the advent of 2009, economists are debating the extent of the impact of global meltdown on the Indian economy in 2009. The predictions range between somewhat optimistic to fairly pessimistic. But the common thread running is that 2009 will be challenging, indeed.

The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia says the stimulus package part two is part of the government strategy to deal with the situation as it evolves.

The fiscal and monetary measures taken under the second package are targeted to increase liquidity for pushing up demand, addressing the concerns of the industries and provide incentives to exporters that have been hit by the recessionary conditions.

The first objective is aimed to be met by reducing the key interest rates further the CRR has been cut by point 5 percent, bringing it down to 5%. The repo and the reverse repo rates have been reduced by1% each, bringing them down to 5.5 % and 4% respectively. All this will leave more funds with the banks to enable them to lend more at lower rates of interest.

The second objective will be met by curbing cheap imports. That explains why certain duties on import of cement, Zinc and ferro-alloys, TMT bars etc. which were removed earlier to fight inflation, have been restored.

The third objective to boost exports is hoped to be met by a twin stroke-increasing duty drawbacks, which the exporters claim against the taxes paid on inputs needed to manufacture the item for export and extend the duration of the scheme up to the end of December this year.

The government is able to do this because the inflation rate is consistently falling for the last one and a half month. As Shri Ashok Chawla Economic Affair’s Secretary in the Finance Ministry observes “the trend is clear. This will translate into lower interest rates.” There is a possibility of inflation rate coming down to a tolerable 5% by the end of the current financial year.

Shri Ahluwalia is confident that despite the gloomy international economic situation India will register growth rate of 7 %.

But, he says, fiscal deficit will be higher than anticipated on account of the stimulus packages announced. The mid-year economic review presented in Parliament, projects its increase to 5 percent against the target of 2.5 percent.

The Reserve Bank of India Governor Shri. D Subbarao too admits that 2009 will be “more challenging” adding that the RBI will continue to do everything possible to mitigate the impact of global crisis on the Indian Economy. He however, says that the outlook for India and the world remains uncertain and the path of global crisis and its resolution remains unclear.

That view is shared by the Nobel laureate Amartya Sen as well. Sen recently admitted that he did not have a ready answer to how deeply global meltdown will affect India in the New Year.

The World Bank President Robert Zoellick predicts that the global economy is likely to “worsen” in the first half of 2009. The IMF chief concurs with him.

The RBI has made it more than clear that it has a road map to deal with the situation and steps will be taken as and when required. To quote Subbarao “our approach has been to cross the river by feeling the stones.” It has already lowered its key interest rates-the CRR to a 2 year low and the repo and reverse repo rates to an 8 year low.

But there are areas of concern as well. Foreign investment flows have declined. The Commerce Minister Kamal Nath informed the Lok Sabha that “FDI inflows between April and September 2008 showed an increasing trend each month in comparison to the same period in the previous year.” But he cautioned that FDI flows to the developing nations would generally decline in 2009. He was however quick to add that the government has put in place a liberal policy which permits FDI up to 100 percent on the automatic route, in most sectors and activities.

The other area of concern is that India’s industrial growth has declined for the first time in 15 years. Since Industry accounts for about 25 percent of the country’s GDP it is bound to affect the growth rate. Exports declined by 9.9% in November last which is also worrisome.

The RBI in its report says there are downsize risks from India’s increasing global integration such as the sustained outflow of capital, financial contagion and slowing world growth. It corroborates Prime Ministers view that in a globalised world, we cannot pretend that we will not be affected by the crisis that has been created somewhere else. But it says that use of a combination of instruments to absorb excessive pressure had helped cushion the impact on Indian economy.

The silver lining is that since 50% of our GDP comes from the service sector, which is not affected much by the global recession, growth rate in the current year will end up around 7%. That is what the mid- year review estimates. Five years of nearly 4% farm growth and high domestic saving rate of 36% is seen as making that possible.

That the government is alive to the situation is apparent through the measures it has been taking in association with the RBI from time to time. It has raised public expenditure by Rs.20,000 crore through the first stimulus package announced on December 7. The RBI too injected Rs.300,000 crore liquidity into the system through a series of cuts in rates . The second package will increase availability of funds with banks and non-banking financial companies by 75,000 crore. The state governments too have been allowed additional market borrowings of Rs. 30,000 crore.

It is now for the Banks and the big industries to fulfill their share of responsibilities and ensure that the measures taken are effective. They need to move hand in hand with the government.

Time and again, the Prime Minister has been assuring the people that despite the international environment the country has the capacity, ability and resilience to cope with the present global crisis. He has been citing the economic crisis of 1991 which Asia faced and which was “more” serious, but India overcame it efficiently. With steadfast commitments of all the players in the field we look forward to see India coming out of the present global crisis with minimum bruises.(PIB Feature)


(Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB)

RBI move to inject Rs 20K cr into system

Signaling a further drop in interest rates, the Reserve Bank of India has announced the reduction of the repo rate under the liquidity adjustment facility (LAF) by 100 basis points from 6.5 per cent to 5.5 per cent with immediate effect.

The reverse repo rate under the LAF will also be slashed by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.

The apex bank also announced that the cash reserve ratio (CRR) of scheduled banks will reduced by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.

The RBI announcement said that the reduction in the CRR will inject additional liquidity of around Rs. 20,000 crore to the financial system.

It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. The Reserve Bank on its part would continue to maintain a comfortable liquidity position in the system.

Even as some public sector and private sector banks have cut lending rates in response to the Reserve Bank’s monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth.

The Reserve Bank continues to urge banks to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality. At the same time, banks should price risk appropriately and ensure that quality enterprises continue to get funding.

The Reserve Bank appreciates that risk management is difficult even in normal circumstances; it is even more difficult in an environment of uncertainty and downturn.

The fundamentals of the Indian economy continue to be strong. Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply. But a period of painful adjustment is inevitable, the Bank pointed out.

Dr Singh gives booster dose to Indian Economy

by Ashok Handoo

Prime Minister Dr. Manmohan Singh has been at every occasion assuring the people of the country that his Government would resort to all policy measures –fiscal, monetary, exchange rate and public spending - to minimize the effect of global economic meltdown on India and that “no instrument of public policy will be spared”. The former Finance Minister Shri P Chidambaram too had also reassured people on the Government’s determination to act.

The present set of fiscal and monetary measures announced by the Government is a part of the same endeavour.

First, the policy measures announced by the RBI Governor Shri D. Subbarao. The cut in benchmark lending rate, the repo rate (the interest it charges from banks for lending money) by a clean 1 percent, from 7.5 to 6.5. It also cut the reverse repo rate (the rate at which it borrows cash from banks) again by 1 percent from 6 to 5 percent. A one percentage point cut in repo rate pumps Rs.40,000 crore into the system.

This is a clear signal to banks to cut lending rates across the board, particularly to the industry, infrastructure, housing, exporters etc,.

This was followed by other measures announced by the Planning Commission Deputy Chairman Shri Montek Singh Ahluwalia in the shape of a stimulus package. These included a 4 percent cut in the excise duty and a Rs. 20,000 crore increase in plan expenditure. The purpose is to stimulate growth by raising demand and keeping the consumption levels in the economy high. A cut in excise rates should bring down the prices of most of the manufactured goods. It will, at the same time reduce Government revenue and widen fiscal deficit, but Shri Ahluwalia made it clear that the Government is not worried on this account as it’s priority is to keep the economy going by keeping the domestic demand high. The 4 percent cut is estimated to cost the Government Rs. 8700 crore by way of foregone revenues but part of it could be redeemed if the demand rises. What the Government looses by duty cut, it would make up through larger volumes.

The decision to provide Rs. 4000 crore refinancing facility to the National Housing Bank for lending to housing companies should make available cheaper home loans. Since housing is an activity which involves many manufacturing sectors, this should boost demand in commodities like cement, steel etc,. it will also help keep huge labour force employed in construction work. Bringing bank loans to housing finance firms under the priority sector should also lead to increased supply of home loans.

Other measures announced aim at providing succor to exporters and small scale units. The Government has decided to subsidise interest costs of exporters by up to 2 percentage points subject to a minimum rate of 7 percent per annum. The Government will also provide an additional Rs.1100 crore for full refund of terminal excise duty or CST where ever applicable and another Rs.350 crore for export incentives schemes. This should go a long way in arresting the slump in the export market.

RBI will also pump in Rs.7000 crore into SIDBI to help micro and small units which employ millions of people. The guarantee cover on loans to lending institutions has also been raised from Rs. 50 lakh to Rs. 1 crore.

For the textile sector, one of the country’s largest employers and exporters, an additional allocation of Rs.1400 crore will be made to clear backlogs in the technology upgradation scheme. This will help textile units to upgrade to improve competitiveness. Import duty on Naptha has been abolished to bring down costs in this sector.

Government Departments have been allowed to replace vehicles within the budget allocations, in the current financial year.

Prices of Aviation Turbine Fuel (ATF) announced earlier, has already brought down air fares and the process is continuing.

After all these measures , the two important questions that remain in public mind are whether the prices of goods and services will actually fall and whether loans will actually be available at cheaper rates. As far as the first is concerned some manufacturing companies have announced that they will pass on the benefit of excise cut to the consumers, almost in full measure. In fact some car companies have already effected it. Some companies producing durable consumer products have begun assessing to what extent they can reduce their prices. The former Finance Minister has been trying to persuade the industry all through that they should cut prices rather than production to help the economy to get out of the current crisis. The present fiscal and monetary measures should make them follow this advice more readily.

Regarding reduction in lending rates, some private banks have announced a cut in home loans. Other banks are taking a fresh look on their lending rates for various segments and are expected to come out with a response sooner than later.

A silver lining has been the consistently falling inflation rate which has now come down to around 8 percent. With the fall in petrol and diesel prices, the general price line is bound to fall further as petrol prices constitute an important ingredient of transport costs. We may thus witness a more comfortable inflation rate much too soon.

Industry sector has welcomed the measures though it expects more to defuse the situation. FICCI described the measures as “a good start in the right direction”.

Assocham President, S. Jindal hopes that money will flow into the system to support the projects that have been put on hold.

The terror strikes will invariably affect the tourism industry which is expecting a 25 percent fall in bookings. This is due to the advisories issued by western nations to their citizens about their visits to India.

The Prime Minster who holds the Finance portfolio also, is confident that the country will be able to maintain the growth rate around 8 percent in the current fiscal. The most pessimistic estimates put it at 7 percent. What is important now is that the industry and other sectors of economy respond to government initiatives in full measure and pass on the benefit of price cuts to the consumers. They need to realize that in the current global crisis when international demand is shrinking, it is only the domestic demand that can keep the business going. Fortunately, India with its 1.1 billion population has a huge potential of keeping demand afloat. All they need is the purchasing power which the Government is trying to do by pumping in funds into the system. (PIB Feature)

Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB.

Doctor's prescription to revive Indian Economy

The Manmohan Singh Government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem.

The first priority was to re-assure the people of the stability of the financial system in general and of the safety of bank deposits in particular. To this end, steps were taken to infuse liquidity into the banking system and also to address problems being faced by various non-bank financing companies. These steps have ensured that the financial system is functioning effectively without suffering the kind of loss of confidence experienced in the industrialised world.

Having assured stability of the system, the Government has focussed its attention on countering the impact of the global recession on India's economic growth. On the monetary side, the RBI has sought to pump sufficient liquidity into the banking system to enable bank credit to meet the expanded requirements of the economy keeping in mind the contraction in credit from non-bank sources. Banks have been provided adequate liquidity through a series of reductions in the CRR and additional flexibility in meeting the SLR requirement. Interest rate reductions have also been signalled by reductions in the repo and reverse repo rates, the most recent of which was announced on Saturday when both the repo rate and the reverse repo rate were cut by 100 basis points. Access to external commercial borrowings has also been liberalised so that borrowers capable of accessing funds from abroad are allowed to do so. The banks are being encouraged to counter what might otherwise become self-fulfilling negative expectations by enhanced lending to support economic activity.

These measures in the area of money and credit are being supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus, the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level because of the loan waivers, issue of oil and fertilizer bonds and higher levels of food subsidy. In addition, the following steps are being taken:

1. Plan Expenditure:

In order to provide a contra-cyclical stimulus via plan expenditure, the Government has decided to seek authorisation for additional plan expenditure of upto Rs 20,000 crore in the current year. In addition, steps are being taken to ensure full utilisation of funds already provided, so that the pace of expenditure is maintained. The total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be Rs.300,000 crore.

The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year.

2. Reduction in Cenvat:

As an immediate measure to encourage additional spending, an across-the-board cut of 4% in the ad valorem Cenvat rate will be effected for the balance part of the current financial year on all products other than petroleum and those where the current rate is less than 4%.

3. Measures to Support Exports

i) Pre and post-shipment export credit for labour intensive exports, i.e., textiles (including handlooms, carpets and handicrafts), leather, gems & jewellery, marine products and SME sector is being made more attractive by providing an interest subvention of 2 percent upto 31/3/2009 subject to minimum rate of interest of 7 percent per annum

ii) Additional funds of Rs.1100 crore will be provided to ensure full refund of Terminal Excise duty/CST.

iii) An additional allocation for export incentive schemes of Rs.350 crore will be made.

iv) Government back-up guarantee will be made available to ECGC to the extent of Rs.350 crore to enable it to provide guarantees for exports to difficult markets/products.

v) Exporters will be allowed refund of service tax on foreign agent commissions of upto 10 percent of FOB value of exports. They will also be allowed refund of service tax on output services while availing of benefits under Duty Drawback Scheme.

4. Housing

Housing is a potentially very important source of employment and demand for critical sectors and there is a large unmet need for housing in the country, especially for middle and low income groups. The Reserve Bank has announced that it will shortly put in place a refinance facility of Rs.4000 crore for the National Housing Bank. In addition, one of the areas where plan expenditure can be increased relatively easily is the Indira Awas Yojana. As a further measure of support for this sector public sector banks will shortly announce a package for borrowers of home loans in two categories: (1) upto Rs.5 lakhs and (2) Rs 5 lakh-Rs 20 lakh. This sector will be kept under a close watch and additional measures would be taken as necessary to promote an accelerated growth trajectory.

5. MSME Sector

The Government attaches the highest priority to supporting the medium, small and micro enterprises (MSMEs) sector which is critical for employment generation. To facilitate the flow of credit to MSMEs, RBI has announced a refinance facility of Rs.7000 crore for SIDBI which will be available to support incremental lending, either directly to MSMEs or indirectly via banks, NBFCs and SFCs. In addition, the following steps are being taken.

(a) To boost collateral free lending, the current guarantee cover under Credit Guarantee Scheme for Micro and Small enterprises on loans will be extended from Rs.50 lakh to Rs.1 crore with guarantee cover of 50 percent.

(b) The lock in period for loans covered under the existing credit guarantee scheme will be reduced from 24 to 18 months, to encourage banks to cover more loans under the guarantee scheme.

(c) Government will issue an advisory to Central Public Sector Enterprises and request State Public Sector Enterprises to ensure prompt payment of bills of MSMEs. Easing of credit conditions generally should help PSUs to make such payments on schedule.

6. Textiles

(a) An additional allocation of Rs.1400 crore will be made to clear the entire backlog in TUF Scheme.

(b) All items of handicrafts will be included under 'Vishesh Krishi & Gram Udyog Yojana'.

7. Infrastructure Financing

A large number of infrastructure projects are now being cleared for implementation in the Public Private Partnership mode. These projects may experience difficulty in reaching financial closure given the current uncertainties in the financial world. In order to support financing of such projects, Government has decided to authorise the India Infrastructure Finance Company Limited (IIFCL) to raise Rs.10,000 crore through tax-free bonds by 31/3/2009. These funds will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in highways and port sectors. In this way it is expected that IIFCL resources used for refinance can leverage bank financing of double the amount. Depending on need, IIFCL will be permitted to raise further resources by issue of such bonds. In particular, these initiatives will support a PPP programme of Rs.100,000 crore in the highways sector.

8. Others

(a) Government departments will be allowed to take up replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.

(b) Import Duty on Naphtha for use in the power sector will be eliminated.

(c) Export duty on iron ore fines will be eliminated and on lumps will be reduced to 5%.

The Government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity.

Giving up on India? U wl repent: Kamal Nath

NEW DELHI: Union Commerce Minister Kamal Nath today said that world would benefit tremendously from a stable, large and growing consumer market provided by India and added that this is not the time for foreign investors to give up on India.

"Foreign investors who withdraw equity investments or shelve FDI plans in India will find themselves behind the curve as our economy picks up its 9-10% pace once again," he said addressing the Plenary Session on “Securing Opportunities for Inclusive Growth in India” at the India Economic Summit here.

Kamal Nath pointed out that India’s reform process has allowed millions of poor people to cross the poverty threshold and added that there is still a lot of room for further reforms in key areas such as public private partnerships, financial sector, and taxation, among others. He said that much action remains on the agenda table for integrating further with the global economy and becoming a vital link in the international supply chain of goods and services, funds and capital, and resources and talent.

The 3-day (16-18 November) Summit is being jointly organized by the Confederation of Indian Industry (CII) and World Economic Forum.

Kamal Nath emphasised that inclusive growth ultimately depends on the productivity of the overall workforce, which in turn is dependent on its education, skill development, technical and professional education, and talent resource levels. India’s workforce numbers around 500 million people and is expected to expand by about 20 million each year for the next ten years. “But 600 million people continue to depend on agriculture as a source of livelihood. While agriculture has been expanding at close to 3% annually, there is need to move people off the land in order to enhance their productivity and increase their incomes”, he added.

Speaking about India’s engagement with the world, he said that India’s total exports in 2004-05 was at $ 83.5 billion, whereas in 2007-08, it exceeded the targets and achieved a doubling of trade to $163 billion and this year, for the period April to September export growth was 31% over the same period last year. At the same time, we continue to be a solid market for overseas goods, he underlined and added that India’s imports have gone up from $ 112 billion in 2004-05 to $ 251 billion in 2007-08 and non-oil imports increased at a rapid clip of 43%. “When we include export and import of services, our external engagement can be placed at over $ 525 billion for the past year, which adds up to more than half of GDP. This is unprecedented in India’s modern economic history”, he said

Indian Economy can survive global crisis

by S. Sethuraman**

India has taken an array of monetary and fiscal measures, in quick succession, to contain inflationary pressures - with the annual rate already moderating from around 13 per cent in August to 10.72 per cent by the end of October - and, more importantly, to make available adequate domestic resources to maintain growth in the face of an unprecedented international financial crisis and global economy drifting into recession.

The Reserve Bank had, within four weeks in October, lowered reserve ratios and reduced a key interest rate to provide some 250,000 crores of liquidity for banks to finance businesses and consumers. These measures, welcomed by the industry and other productive sectors, have helped to impart a sense of confidence about India‘s ability to weather the global storm.

Growth Momentum:Prime Minister Dr Manmohan Singh remains focussed on seeing that the Indian economy does not get unduly affected by the adverse developments abroad. He has appealed to the industry and the country in general to turn the crisis in the world economy into an opportunity to ensure that India comes out of the global crisis with its fundamentals unimpaired, protecting employment.

What gives confidence and strength to the Indian economy is its sound financial sector with its well-regulated and well-capitalised banking system, the sustained growth in deposit accretion and credit flows, and assured safety for depositors, the global competitiveness of its manufacturing and services, high savings and investment rates and a comfortable level of foreign exchange reserves which could be drawn to make up for any shortfalls in capital inflows.

The Finance Minister Shri P Chidambaram has urged banks to lower interest rates, in the light of the steps taken by RBI both on liquidity and interest rate, and several public sector banks have already announced plans on reducing their prime lending rates. Banks have been asked to increase credit for productive purposes and ensure credit quality. RBI has also suggested to banks to restructure the dues of small and medium enterprises on merits.

There is general expectation that inflation would continue to moderate - especially now that global prices of oil (though still volatile) and commodities have sharply declined from their high levels in the first half of 2008 - and RBI projects that the annual rate of inflation would be down to 7 per cent by March 2009. India can well maintain growth at not less than 7 to 7.5 per cent, as the Prime Minister pointed out, despite some adverse impact on trade and capital flows which all countries have begun to experience in these uncertain times. Even at 7.5 per cent, India will remain the second fastest growing economy.

Given the unsettled conditions in global markets, the Prime Minister has set up an high-powered group chaired by him to closely monitor the evolving macro-economic situation so that growth momentum is sustained at reasonable rates. A committee of senior officials would keep a day-to-day track of trends.

Monetary & Fiscal Measures: The Reserve Bank of India had vigorously moved in October to bring down the cash reserve ratio from a peak of 9 per cent to 5.5 per cent, reduce the key policy interest rate (repo) from 9 to 7.5 per cent and also the statutory liquidity ratio by one percentage point to 24 per cent of their net demand and time liabilities. These were all designed to inject massive doses of liquidity to the banking system which in any case has been recording a higher credit growth in the current year. Nevertheless, when there was some liquidity constraint experienced by money markets and the foreign exchange market also coming under demand pressures, RBI had to intervene with remedial measures.

As part of measures to minimise the adverse impact of global crisis on domestic economy, the Finance Minister has reduced certain duties to give relief to some of the affected sectors like steel and aviation. On the budgetary side, higher allocations for social sectors and rural employment and other flagship programmes should generate consumption which contributes to economy’s growth. Most corporates including in the I T sector and banks have managed to maintain profitability, though somewhat lower than expected, in the second quarter (July-September), and the recent government measures on liquidity and interest rates should help to sustain business confidence.

Monetary policy has moved away from continued tightening, in the days of inflation climbing during 2008, to a significant easing of curbs with the steady moderation in the annual rate of inflation after peaking at 12.65 per cent in August. It had since been coming down over recent weeks and stood at 10.72 per cent in the week ended October 25. While the fall in inflation rate has been facilitated by the sharp drop in global prices of oil, food and other commodities as well as domestic supply management, the oil market remains volatile. Taking crop prospects and other domestic factors into account, RBI continues its monetary policy stance of maintaining growth with price stability as well as orderly conditions in financial markets.

Macro-Economic Management: India has to summon all its abilities at macro-economic management because of the extraordinary global situation in which there is weakening of global demand and likely interruption in external capital flows. So far, there have been only ripple effects on the economy and exports in the first half of the fiscal year (April-September) have recorded a robust 35 per cent growth. But oil imports at higher prices have pushed up the import bill and trade deficit is widening. There was some ‘knock-on’ on financial markets but there is no longer any sign of liquidity tightening with the measures taken.

Many developing and leading emerging economies including China and Korea have come under strain and some of the poorer countries face risks of economic disruption because of fiscal and balance of payments difficulties. China’s growth, largely export-led hitherto, has also slowed down and it is reorienting its policies to promote greater domestic consumption with the weakening of external demand especially from USA and Europe due to recessionary conditions there. India’s exports can be maintained without loss of momentum in the latter half of the year with greater focus on products and growth markets, especially with the exchange rate which has depreciated in relation to the dollar.

While there has been an outflow of foreign portfolio investments of the order of 10 billion dollars, India continues to attract foreign direct investment which totalled an impressive 17.66 billion dollars in the first six months, April to September, compared to 7.25 billion in the corresponding period of last year. There has been some draw down on our reserves to meet imports and other payments. With its sound management and continued liberalisation, India continues to be an attractive investment destination, especially if investors have to seek avenues away from the recession-hit developed nations. (PIB Features)

*Freelance Journalist

Disclaimer : The views expressed by the author in this feature are entirely his own and do not necessarily reflect the views of PIB.