There are now signs of an upturn in industrial production and revival of credit demand, though the delayed monsoon has increased the downside risks
On current assessment, the growth projection for GDP for 2009-10 is placed at 6% with an upward bias, the Reserve Bank of India (RBI) said on Tuesday while announcing the first quarter review of the annual monetary policy. This updated growth projection for 2009-10, thus, marks a slight improvement over the growth expectations of around 6% indicated in the Annual Policy Statement in April, the central bank said.There are now signs of an upturn in industrial production and revival of credit demand, though the delayed monsoon has increased the downside risks to agricultural production, the RBI said in a statement. Although the share of agriculture and allied activities in GDP has declined over the years and is currently at 17.5%, good agricultural performance is critical not only because it employs over 55% of the labour force but also for ensuring stability in food prices, it added.
Domestic and external financing conditions are also now more favourable than they were in the second half of 2008-09, the RBI said. The business outlook has turned positive signaling a revival of industrial activity, it added. But, export demand will continue to remain weak. Similarly, during the earlier part of 2009-10, the services sector may experience the drag of sluggish external demand and the lagged adverse impact of the weak industrial growth, the RBI said.
Also, the onset of the south-west monsoon has been delayed and it remains below normal, increasing the downside risks to agricultural production, the central bank said. On balance, an uptrend in the growth momentum is unlikely before the middle of 2009-10, it added.
In 2008-09, real GDP increased by 6.7%, in line with the projection in the RBI's Annual Policy Statement. However, the growth pattern was uneven as real GDP growth decelerated from 7.7% in the first half of the year to 5.8% in the second half.
This was mainly because of the global financial crisis, which affected external demand, domestic private consumption and investment demand, the RBI said. The overall macroeconomic scenario continues to be uncertain, although it is expected that the fiscal and monetary stimulus measures will boost domestic demand in 2009-10, it added.
The growth of 6.7% during 2008-09 was better than most analysts had expected, and decidedly better than the performance of most other economies, the RBI said. The growth projection for the current year of 6% with an upward bias reflects the absence of any firm signs of definite recovery in the world economy, it added. The challenge is to return the economy to the high growth rate of 9% that we averaged in the period 2005-08, the RBI said.
Notwithstanding the temporary hiccups of the crisis period, India is not a demand constrained economy; it is a supply constrained economy, the RBI said. The critical requirement for accelerated growth is to raise the level of investment, particularly in infrastructure, it added.
Despite some measured optimism of a turnaround sooner than expected, a firm recovery at the global level is unlikely before 2010, the RBI said. This continued uncertainty in the immediate outlook is reflected in the downward revision of global growth for 2009 by the IMF from (-)1.3% made in April 2009 to (-)1.4% in July 2009, it added.
Since the outbreak of the crisis in mid-September 2008, the RBI has maintained an accommodative monetary stance. "It will be our endeavour to maintain a policy stance that will aid return of the economy to the high growth path. At the same time, there are factors - stubborn food price inflation, rebound in world commodity prices, expansionary monetary and fiscal policies - that could potentially build inflationary pressures," the RBI said. Accordingly, the task of returning the economy to a high growth path, viewed from the current perspective, throws up some important challenges, it added.