[sbinews] The Outlook for Indian Economy - An Update (by Sri. Y. V. Reddy- Governor, RBI)

  • From: "Rajendra S. Pai" <rajendra.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Fri, 9 Jan 2004 09:20:51 +0530

Dear Colleagues,
The full text of RBI Governor Sri. Y.V. Reddy's speech on the Outlook for
the Indian Economy is reproduced below. (Source: RBI Website)


The Outlook for Indian Economy - An Update
January 7, 2004
76th Annual General Meeting of FICCI, New Delhi

The Outlook for Indian Economy : An Update

Friends, I am thankful to President Mr. Muthiah for giving me the
opportunity to address the 76th General Meeting of FICCI. I had the
privilege of addressing FICCI in New Delhi about a year ago (October 24,
2002), at the invitation of Mr. Lodha and the subject was, if I recall
right, "World Economic Outlook and Financial Market Developments -
Implications for India". Today, I will share with you Reserve Bank of India'
s latest assessment of outlook for Indian economy for the rest of the
current fiscal year, while no doubt also capturing some global developments.

You may recall that on November 3, 2003, we set out the Mid-Term Review of
Monetary and Credit Policy for the year 2003-04. The first part of the
Statement, as in the past, provided a mid-year Review of the macroeconomic
and monetary developments of the economy with a focus on the outlook for
2003-04. In that light, the stance of the monetary policy set out in April
2003 was left unchanged. Today, I propose to place before you an update on
the outlook for the Indian economy in the light of developments since
November 3, 2003. The structural reforms mentioned in Part-III of the
Mid-Term Review will not be part of the presentation today, though they
remain important in achieving the progress that we anticipate.

It may be recalled that at the time of the Mid-Term Review, there was
reasonable expectation of an overall GDP growth of 6.5 per cent to 7.0 per
cent, with an upward bias, for the year 2003-04. This projection was
actually an upward revision from the earlier projections of around 6.0 per
cent made in the April Policy Statement. At the time of the Mid-Term Review,
Central Statistical Organisation (CSO) estimates of GDP growth were
available for the first quarter of 2003-04. These estimates placed the first
quarter growth at 5.7 per cent over the GDP in the corresponding quarter of
the preceding year. We made an upward revision in our growth assessment as
several other indicators that pointed to acceleration in real economic
activity were available. The second quarter estimates that have recently
been released by the CSO validate our view of high growth in 2003-04. The
impressive real GDP growth of 8.4 per cent in the second quarter places us
firmly amongst the fastest growing economies in the world during the current
year. More importantly, the second quarter estimates show that buoyancy has
been spread across most sectors of the economy and is not confined merely to
agriculture, which still accounts for most of the rebound. The manufacturing
sector has recorded a significant growth of 7.3 per cent in the second
quarter of 2003-04, continuing the sustained acceleration from the low of
2.9 per cent growth registered in first quarter of 2001. The improved
prospects for real activity globally should add strength to the upward
momentum in growth. On balance, therefore, there is room at this juncture
for greater optimism in growth prospects than before. It is reasonable to
expect that unless there are unforeseen circumstances, the overall GDP
growth for the year 2003-04 as a whole, which was estimated at 6.0 per cent
at the beginning of the year and 6.5-7.0 per cent in November is, on latest
assessment, likely to be higher and around 7.0 per cent with a continued
upward bias.

Inflation is the other key parameter that is taken into account in monetary
policy formulation and it is measured primarily in terms of variation in the
wholesale price index (on a point to point basis). The Mid-Term Review had
placed the inflation projections for policy purposes in the range of 4.0 per
cent to 4.5 per cent with a possible downward bias. It was also mentioned
that the RBI would continue to closely monitor the price behaviour leaving
no room for complacency on the inflation front. As you are aware, the annual
rate of inflation was 6.7 per cent at the time the April policy projections
were made and it continued in the range of 6.3-6.9 per cent for nearly two
months thereafter. It, however, declined to around 4.0 per cent in August,
before climbing back to 5.0 per cent or more since September 20, 2003.
Inflation rate has risen further since the Mid-Term Policy on November 3,
2003 and as on December 20, 2003, the point-to-point inflation rate was 5.6
per cent. The inflation trends in the last two months have not been
unexpected but, the magnitude of price rise has been above the original

The increase in inflation in the last two months appears to be mainly on
account of fruits, vegetables, mineral oils, fuels, and cotton textiles. Two
important international factors have contributed to more than the
unanticipated upward pressure on prices. First, international oil prices
have remained firm. The average price of OPEC basket had reached US$29.5 a
barrel at the end of 2003, while US prices are hovering around US$32 a
barrel. The global oil prices today are thus about 10 per cent higher than
they were at the time of the Mid-Term policy Statement. The outlook for oil
prices in the near term appear highly uncertain. Secondly, world primary
commodity prices have also increased in 2003. These trends, along with
revival of growth and falling excess capacities in several advanced
economies have brought about a noticeable shift in the outlook for prices.
The fear of deflation in advanced economies has been replaced by a possible
upward pressure, led by increases in commodity prices. No doubt, these
international developments enhance the probability of international
transmission of inflation. At the same time, there are three favourable
factors to counter these recent adverse global developments. First, in the
normal course, it is expected that the inflation rate would fall in the
period mid-January to March 2004. Secondly, there are cushions in terms of
food stocks and ample forex reserves. Thirdly, our economy has, in recent
years, shown remarkable resilience in absorbing shocks including on the oil
front. In view of all these factors, it is possible that the downward bias
may not be attainable but it appears that the range of 4.0 per cent to 4.5
per cent for inflation indicated in the Mid-term Review continues to be
relevant for policy purposes unless there are unanticipated severe shocks.
It may be noticed that the policy assumption in April 2003 was 5.0-5.5 per
cent and the latest assessment placing it in the range of 4.0-4.5 per cent
demonstrates that, overall, inflationary situation continues to be benign
for 2003-04.

There has been a marginal improvement in central government finances since
the Mid-Term policy Statement. The gross fiscal deficit of the Central
Government as at the time of Mid-term Review which was higher by 40.3 per
cent (based on fiscal data available up to September 2003) is now higher by
12.3 per cent (based on fiscal data available up to November 2003) over the
corresponding periods of last year. Similar improvement is also seen on the
revenue account, which was higher by 37.4 per cent, is now higher by 13.0
per cent over the same periods under reference. The gross fiscal deficit of
the Central Government may get relief by virtue of the debt swaps of the
State Governments but a clearer picture would be evident in the next few
months. At this juncture, it is necessary to reiterate the importance of
pursuing promptly, and with resolve, fiscal consolidation for the medium

There are some signs of pick up in credit off-take in recent months.
scheduled commercial banks' non-food credit, in the current financial year,
increased by 8.1 per cent by mid-December [upto Dec. 12, 2003], as compared
with an increase of only 2.7 per cent upto mid-September [upto Sept. 19,
2003]. While credit expansion till Mid-September this year was clearly lower
than in the corresponding period of last year, the credit expansion in three
months since then, i.e. between mid-September and mid-December has been
nearly 50 per cent more than in the corresponding period of last year. The
total resource flows to the commercial sector in 2003 so far, i.e., up to
end-November 2003 has been higher than last year by Rs.3,058 crore. There
are continued indications of a shift in corporate financing pattern in
recent years with increased reliance on internal finance and on external

Consistent with these developments, in the current financial year up to
December 26, 2003, money supply (M3) remained with an increase of 10.1 per
cent as compared with 10.1 per cent in the corresponding period of the
previous year. Reserve money increased by 6.9 per cent this year so far as
against an increase of 1.5 per cent in the corresponding period of the
previous year, mainly reflecting the large capital inflows and consequent
increase in RBI's net foreign currency assets.

The financial markets continue to remain generally stable. While the average
daily absorption in the repo transactions under the Liquidity Adjustment
Facility (LAF) during the year continue to be in the same range during the
last two months as it was in previous months, the average call money rate
moved down by a little over 20 basis points. The yield on treasury bills of
different maturities has declined, while the yield on Government securities
with 10-year residual maturity has marginally firmed up since November 2003.
In fact, a slight steepening of the yield curve is noticeable with shifts in
yield at the very long-end. By and large, the behaviour of the fixed income
market has been in consonance with the monetary policy stance.

In the light of expectations in the monetary policy about a reduction in the
lending rates, there is some evidence of a commitment by banks to reduce the
Prime Lending Rates (PLRs) in January, 2004. Following the introduction of
the benchmark PLR (BPLR) concept, 11 public sector banks have already
announced their BPLR while the rest have assured the Indian Banks
Association (IBA) that they will similarly announce their rates. As a
result, the new BPLRs are now lower by 25-50 basis points. The progress in
regard to movement of interest rates by the banking system has been largely
in consonance with policy expectations. While no direct link can be
established between lending rates and credit off-take, simultaneous and
intensive efforts will have to be undertaken by the banking system to remove
the procedural and transactional rigidities in the delivery of credit,
particularly to agriculture and small industries. A noteworthy feature of
credit off-take has been the impressive increase in priority sector lending
in the current financial year and this has posted the highest growth in
recent years. There is scope for further improvement in regard to both
credit pricing and credit delivery. Efforts by RBI, with close co-operation
from banks, will have to be intensified.

Now, let me turn to external developments. Since the Mid-term Review, the
prospects for the world economy have improved further, while at the same
time, the uncertainties relating to the currency movements of major
currencies have increased. Whereas the monetary policy in many countries has
moved to mild tightening in some countries, in others there is a neutral
bias with expectations of tightening, particularly in the U.S., with no firm
indication on the timing. These uncertainties would necessarily have an
impact on global liquidity as well as the flow of resources to emerging
countries including India. As far as India is concerned, the relative weight
of the fundamentals and confidence in the economy appears to be more than
the global liquidity factors that govern the capital flows. As such, on
current reckoning, for us there could be some moderation, but no dramatic
deceleration, in capital inflows.

The Indian forex market generally continued to witness orderly conditions
during recent months. At the time of the mid-term policy, the exchange rate
of the rupee, over the end-March 2003 levels, had appreciated by 4.8 per
cent vis-à-vis the US dollar but depreciated by 2.3 per cent against the
Euro, 2.5 per cent against the Pound Sterling and 4.2 per cent against the
Japanese Yen. During November-December 2003, the US dollar has depreciated
by 7.9 per cent against the Euro, 4.7 per cent against the Pound Sterling
and 3.0 per cent against the Yen. During November-December, 2003, the rupee
has depreciated against all these currencies; by 8.5 per cent against the
Euro, 5.3 per cent against the Pound Sterling and 3.6 per cent against the
Yen and by only 0.6 per cent against the US dollar. It is, therefore, clear
that the phenomenon in the last few months should appropriately be described
as a significant depreciation of the US dollar. In general, the adjustment
in the US dollar, which was considered to be essential, seems to have taken
place in large measure in a non-disruptive manner so far. There are,
however, emerging pressures on the distribution of the burden of adjustment
mainly between US, Euro area, and Asia, especially Japan and China.

Under these circumstances, there appears to be considerable merit in
continuing with our policy of exchange rate management of the rupee
addressing essentially the volatility issues without a fixed target. As a
result of this policy of exchange rate management, in the context of
maintaining orderly conditions in the forex markets, the foreign exchange
reserves increased by US $8.0 billion during November-December 2003. As
mentioned in my recent address at the Bank Economists Conference,
considering the state of markets and the capabilities of the market
participants in our country, non-volatility in financial markets has to be
treated as a public good and perhaps it is worthwhile reiterating this

The growth rate in our exports in the current financial year continue to be
around half of what it was in the corresponding period of last year. Though
half, the export growth of 8.8 per cent during April-November 2003 is on top
of an increase of 18.0 per cent in the corresponding period of last year. In
November 2003, export growth accelerated to 13.7 per cent, which was higher
than 10.8 per cent growth in November 2002. On current reckoning, the
prospects for exports appear to be as anticipated two months ago.

Imports have accelerated this year on the back of revival of domestic
economy [22.0 per cent in US dollar terms during April-November 2003]. Oil
imports in US dollar terms are higher by 12.4 per cent. Non-oil imports have
increased at a high rate of 26.5 per cent. Detailed commodity data available
till August shows that during the first five months of the current financial
year, non-oil, non-gold import increased by 23.1 per cent as compared with
an increase of 11.9 per cent in the corresponding period last year. The
trade deficit in the current financial year so far has widened, in fact is
double of last year. The current account, however, remains in surplus on
account of robust invisible earnings.

It will be useful to conclude this presentation with an overall assessment.
The macroeconomic environment has continued to improve during the year. It
has reinforced the positive outlook on the domestic economy, though some
uncertainties prevail in regard to global environment. Furthermore, comfort
can be drawn from the fact that the Indian economy has demonstrated
considerable resilience to exogenous shocks in recent years. The optimism
reflected in business confidence surveys at the time of Mid-Term Policy
Review seems to have been further enhanced and the credit rating agencies
have taken positive note of recent developments. The inflation outlook by
and large remains benign, though careful monitoring and management would
have to continue with a view to cushion supply shocks and better manage
supply bottlenecks for individual commodities so that price volatilities are
evened out. The money, government securities and forex markets remain
stable. The foreign exchange reserves are at a more comfortable level than
ever before and there is adequate liquidity in the system. The yield curve
has slightly steepened. These gains can be, however, consolidated with
further progress in regard to credit delivery and credit pricing. Moreover,
investment activity, both in the public and private sectors has to pick up
to enable sustained acceleration in growth.

In brief, I would like to submit that the monetary policy stance set out
earlier in April 2003, has served us well so far. In fact, growth in GDP for
2003-04 which was estimated at 6 to 6.5 per cent at the beginning of the
year, now appears to be around 7.0 per cent with an upward bias; while
inflation which then was assumed to be in the range of 5.0 to 5.5 per cent
may now be in the range of 4.0 to 4.5 per cent. Assuming that there are no
unexpected adverse developments, there is merit in maintaining the status
quo as far as the monetary and credit policy measures are concerned, while
pursuing with the reform process. Hence, unless unforeseen circumstances
emerge, the current measures should in the normal course remain till the
next Monetary and Credit Policy in April 2004. Against this backdrop, the
Reserve Bank expects the growth momentum to be reinforced, inflation to be
contained as indicated, financial stability continued to be maintained and
external sector to perform well. In conclusion, may I say that the overall
developments in the economy are favourable and provide the main springs for
a strong revival of investment by industry?

Thank you.

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