Dun & Bradstreet

Economy Outlook 2009-10

The economic journey in 2008 and the year ahead

Preface
The Economic Journey : 2008
Indian Economy
Real Sector Price Scenario
From expectations of soft landing From the fear of high inflation to the
Outlook : 2009-10
to fears of a slowdown early signs of deflation
Money & Finance External sector
From a stance of monetary tightening to From a realistic export target of US$ Some Concerns
monetary softening 200 bn to missing it by a few miles to Growth
Economy Outlook 2009-10
Preface
In the past year, the Indian as well as the global economy
has witnessed a very high degree of uncertainty and
volatility. While the year began on a reasonably optimistic
note - particularly for the Indian economy - sentiment was
completely reversed as the year drew to a close. Just to
underscore this aspect, the D&B Business Optimism Index1
for Q4 2008 fell by over 28% as compared to the previous
year, when it had actually risen by as much as 9% in Q4
2007. At the end of 2007, when we had put down our
expectations for the coming year, we had stated talent
crunch and the availability of well trained human resources
would be the key theme of the coming year. Of course, that
expectation has been completely belied in the past 3 - 4
months, as news of retrenchment, job cuts and slowdown
in hiring across various segments of the Indian economy
streams in. This sharp shift underscores the somewhat grey
theme of the year gone by, as the global financial crisis
turned into a global economic slowdown, impacting the
fortunes of the Indian economy along its way.
At Dun & Bradstreet, we have had to revise our forecast of
GDP growth for FY09 as many as three times in the past 8
months, which again highlights the sharp and sudden
change in the variables that affect and impact the
economic environment. As the economy battled with high
rates of inflation, followed by strict monetary tightening,
liquidity crunch and a deteriorating global economic
environment, among others, the outlook for growth
considerably worsened.
The outlook for the global economy continues to remain
bleak. IMF has estimated that world economic growth will
fall to 0.5% in 2009, which is the lowest rate since World
War II. The advanced economies are expected to contract by
2 percent in 2009, while growth in emerging and
developing economies is expected to slow sharply from
over 6% in 2008 to just a little over 3% in 2009. The global
economy is expected to experience gradual recovery in
2010, when growth is estimated at 3%, as the impact of
expansionary fiscal and monetary policies starts to set in.
It is inevitable that the fortunes of the Indian economy will
be impacted by the growth prospects of the world
economy as export demand continues to fall, and external
financing becomes progressively constrained. However,
1
The Business Optimism Index (BOI) instituted by Dun & Bradstreet (D&B) India is a measure of business confidence on the future outlook for the ensuing quarter.
1
there are some inherent strengths within the Indian
economy, which have spawned the idea of its 'decoupling'
from the global economy. While it is debatable whether
economies such as India will remain completely insulated
from the negative growth prospects of the global
economy, there are some factors that might play a
mitigating role in the face of the spreading contagion. The
presence of a large domestic population, along with the
increase in its per capita income on the back of sustained
economic growth over the past few years is expected to
provide enough of a demand stimulus to ensure continued
economic growth for India. Further, a strong saving and
investment rate will contribute towards shortening the
length and severity of the current slowdown, and also
towards a faster revival, when the economic turnaround
sets in.
It has become imperative for businesses to track the
economic environment on an ongoing basis when
changes come in such a dynamic fashion; when
perceptions on where macroeconomic risks lie are so
numerous and changing so often; when the immediate
business environment becomes so closely linked with
events that are largely beyond our immediate control.
This report has been prepared with the idea of providing a
forecast of key macroeconomic variables, which will
determine the course of the business environment over
the next fiscal. Since an understanding of the future is
impossible without a careful study of the past, the report
also summarises the events of the year gone by. This not
only provides a roadmap for how we have reached where
we are, but also provides significant clues for what needs
to be done for us to get back on the high growth trajectory.
The coming financial year will bring significant growth
challenges for the wider economy, and of course individual
businesses as well. Timely and appropriate policy action
will be the key towards managing growth at the macro
level, while a keen sense of attention to detail in terms of
cost management, process control and revenue focus will
determine survival of individual businesses. We, at D&B
India, hope that the review and forecasts contained in this
report will aid businesses in planning and charting their
growth path over the next year.
Economy Outlook 2009-10

The Economic Journey: 2008

Real Sector
From expectations of soft landing to fears of a slowdown
The Indian economy was on a roller coaster ride Real GDP Growth
in 2008. At the beginning of the year, overall sentiment 12.0 10.4 10.2
prevalent in the economy was optimistic and backed by 10.0 9.4 9.2
healthy balance sheets, companies were ploughing back a % Y-O-Y Growth 8.0 7.4
portion of their earnings into their business through 6.0 5.3 5.7
investments in capacity expansions. Employment scenario 4.0
was upbeat, though the industry was facing a talent 2.0 1.2
crunch. While the global economic environment started to 0.0
deteriorate by this time owing to simultaneous turmoil in Agriculture Industry Services GDP at
food, energy and financial sectors, the Indian economy was factor cost
expected to remain insulated and in the worst case
Jan-Dec 07 Jan-Dec 08
scenario, was expected to be affected only marginally. The
strength of domestic demand was expected to sail India Source: Central Statistical Organisation (CSO)
through the crisis; however, increased integration of the averaged 7.4% as compared with 9.2% during the
Indian economy and its financial markets with the rest of corresponding period of the previous year.
the world ensured that the ripple effect of the global crisis
was transmitted to the domestic economy via the trade The manufacturing sector's growth slowdown was more
and finance channels. Consequently, towards the end of pronounced and almost halved to 4.02% during Jan-Dec 08
2008, corporate profits started to wither, investment from 9.9% during Jan-Dec 07, which caused moderation in
demand started to shrink and the talent crunch situation industrial GDP growth at 5.7% during Jan-Dec 08 as
witnessed during the beginning of the year turned into a compared with 9.4% during Jan-Dec 07.
talent galore situation owing to dearth in employment
opportunities. The economic growth forecasts went The significant decline in growth of manufacturing sector
through several rounds of revision, and most of these were is partly attributed to the elevated input costs. Prices of
tilted downwards. Strength of business confidence, which several raw materials such as minerals, basic metal alloys
was palpable in the number of IPOs, M&As and private and metal products and chemicals increased substantially
equity deals made till 2007, also took a hit during 2008. The during the first nine months of 2008. Input costs were
declining trend in the D&B's Business Optimism Index further pushed up by fuel prices, which surged during this
further corroborated the receding business confidence. time. Manufacturers could not pass on increase in input

The Indian economy registered around 9.0% growth Slowing Pace of the Indian Economy
during FY04-FY07 and this growth rate gave rise to hopes 11.0 10.6 14.0
% Y-O-Y Growth

% Y-O-Y Growth

10.2
of structural shift in economic growth. With such 10.0
9.8
9.3
9.7 12.0
9.1 9.1 8.9 8.8 10.0
a significant growth, debates on a probable overheating of 9.0
7.9 8.0
8.0 7.6
the Indian economy started somewhere towards the end 6.0
7.0
of 2006. However, owing to a changing dynamics, concerns 6.0
4.0
5.3 2.0
of overheating (till start of 2008) were replaced with 5.0 0.0
concerns of the Indian economy moving into slowdown 4.0 -2.0
Jan-Mar 06

Apr-Jun 06

Jul-Sep 06

Oct-Dec 06

Jan-Mar 07

Apr-Jun 07

Jul-Sep 07

Oct-Dec 07

Jan-Mar 08

Apr-Jun 08

Jul-Sep 08

Oct-Dec 08

towards the end of 2008.

Real GDP, which witnessed substantial moderation during

Jan-Dec 08, is one of the key indicators of an economy that GDP LHS IIP RHS
is losing steam. During Jan-Dec 08, India's GDP growth Source: CSO

2
Economy Outlook 2009-10

Real Sector
costs through price rise to customers given the subdued investors, due to the worsening of global financial crisis in
demand conditions. Cement, construction and steel the latter half of 2008, drained the external financing
industries, more specifically, witnessed significant route for the corporate sector. The bearish sentiment in the
moderation in growth, owing to elevated international domestic stock markets due to FII outflows also made it
prices of inputs such as crude oil, coke and coal. difficult for the corporate sector to raise funds from this
avenue. The freezing of external as well as internal mode of
Besides, demand was subdued in real estate and consumer financing, coupled with subdued demand conditions has
durables sectors on account of high interest rates. The RBI impeded investment growth. This was further reflected in
further hiked key policy rates in Jan 2007 amidst rising the substantial moderation in growth of ‘basic metal and
concerns of overheating of the economy; this high interest alloy’ industries and ‘machinery and equipment, other
rate regime lasted till mid-2008. High interest regime and than transport equipment’ industries, which pulled down
consequent moderation in retail credit off take caused growth in capital goods sector to 8.7% during Jan-Dec 08
deceleration in credit-funded consumption demand. As a from 19.6% during Jan-Dec 07. Further, a significant
result, growth in private final consumption expenditure slowdown in exports (particularly of textiles, leather and
slowed down to 7.0% during Jan-Dec 08 as against 7.9% fur products, and gems and jewellery) and weak domestic
during the corresponding period of the previous year. demand conditions curbed production, leading to
The combined effect of decelerated domestic demand, downsizing of labour in many industries.
elevated input costs, and high interest rates was primarily The services sector, which has been the key growth driver
felt by the manufacturing sector, with as many as 14 out of over the last five years, has also started showing signs
17 major industry groups witnessing lower growth during of moderation, reflecting the combined impact of elevated
Jan-Dec 08. Domestic industrial activity also slowed down fuel prices (till Aug 08), high interest rates, and global
as a result of downturn in manufacturing sector as evident economic slowdown. Growth in services sector averaged
from the sharp slowdown in the average growth of Index at 10.2% during Jan-Dec 08 as against 10.4% during
of Industrial Producton (IIP) to 4.2% during Jan-Dec 08 as Jan-Dec 07.
compared with 9.9% during Jan-Dec 07.
The RBI took a number of monetary easing and liquidity
Furthermore, investment demand slowed down in the enhancing measures since Sep 08 to mitigate the impact
economy with rising borrowing cost (a result of monetary of the global economic meltdown on the Indian economy.
tightening measures) and weakening business confidence The government also announced a slew of fiscal measures
amidst slowing consumption demand. Global liquidity to stimulate demand, which included an additional plan
crunch and rising risk aversion among international expenditure of up to Rs 200 bn in the current fiscal, an
additional allocation of Rs 14 bn to clear entire backlog in
D&B's Composite Business Optimism Index
220.0
Technology Upgradation Fund Scheme (TUFS), an across-
200.0 the-board cut of 4.0% in the ad valorem Cenvat rate,
Index Value

180.0 and a 2.0% interest subvention for labour-intensive

160.0 export sectors.
140.0
120.0 While these measures are likely to boost demand and
100.0 support economic growth to a certain extent, one cannot
80.0 rule out the chances of a marked slowdown in economic
Jan-Mar 06

Apr-Jun 06

Jul-Sep 06

Oct-Dec 06

Jan-Mar 07

Apr-Jun 07

Jul-Sep 07

Oct-Dec 07

Jan-Mar 08

Apr-Jun 08

Jul-Sep 08

Oct-Dec 08

Jan-Mar 09

activity in the forthcoming quarters. Nevertheless, since

the underlying fundamentals of the Indian economy
continue to remain strong, D&B expects India to recover
Source: D&B Research faster from the current turmoil.

3
Economy Outlook 2009-10

Money & Finance

From a stance of monetary tightening to monetary softening
All segments of the financial sector witnessed huge Changing Monetary Policy stance
volatility in 2008. The year was eventful for the RBI as it 9.50 Mo
shifted its approach significantly from a tight monetary sti net
mu ary
8.50 lat ea
policy stance in the beginning of the year to easing of to e g sin
tening row g t
7.50 ry tigh th o
monetary policy stance by the end of the year, on account Moneta inflation
conta in
of various developments on the international as well as % 6.50

domestic front. In the beginning of the year (Jan-Aug 08), 5.50

high inflation and mounting liquidity pressures induced 4.50

the RBI to tighten its monetary stance to rein in inflation 3.50

expectations and to decrease demand-side pressures on
the inflation front. However, the gradual intensification of
the global financial crisis and its ripple effects on the real
sector across the globe had begun to adversely affect the
Indian economy via the financial as well as trade channels.
This turn of events prompted the RBI to shift its policy focus
from inflation control to demand stimulation and growth
enhancement since Oct 08.
The Indian economy ushered in 2008 amidst excess
liquidity related problems in the system. Strong capital
inflows over the last couple of years, spurred by strong
fundamentals of the Indian economy and widening US-
India interest rate differential, had put significant upward
pressure on the rupee and also increased liquidity in the
system. The RBI's intervention in rupee market through
dollar purchases (Jan-Apr) also contributed to the excess
liquidity in the system to a certain extent. The RBI had
resorted to auctions under the Market Stabilisation
Scheme to sterilise increasing foreign capital inflows.
Money supply was growing by 23.8% (as of Jan 18, 08), far
above the RBI target rate of 17.5% for FY08. During Jan-May
08, the call rates largely remained within the repo and
reverse repo corridor indicating easy liquidity condition.
Moreover, inflation, which had begun to rear its head since
Jan 08, crossed the RBIs tolerance level of 5-5.5% during
mid Feb 08 owing to rising international fuel and food
prices and excess liquidity conditions in the domestic
markets. Inflation climbed up further to 8.0% in Apr 08 and
8.9% in May 08, thus inducing monetary action by the RBI
to control inflationary expectations.
With inflation and money supply growing far above RBI's
target, the RBI raised the CRR by as much as 75 basis points
26-Apr-08
10-May-08
24-May-08
11-Jun-08
24-Jun-08
5-Jul-08
19-Jul-08
29-Jul-08
30-Aug-08
11-Oct-08
20-Oct-08
25-Oct-08
3-Nov-08
8-Nov-08
8-Dec-08
2-Jan-09
17-Jan-09
Reverse Repo Rate Repo Rate Cash Reserve Ratio
Source: RBI
effective in 3 phases during April and May to control excess
liquidity and to rein in inflationary expectations.
Concomitantly, concerns over moderation in economic
growth were rising; hence, RBI maintained a status quo on
interest rate front. However, with unabated rise in
inflation, which touched double digit level in Jun 08 and
peaked in Aug 08 backed by high international commodity
prices, the RBI tightened its monetary stance further to
control demand side pressures on inflation and signalled
that inflation control was the top priority during this
period. Between Jun and Aug 08, the RBI increased repo
rate by 125 basis points and CRR by 75 basis points to 9.0%
each. The sentiment in the bond market remained largely
bearish during Jan-Aug 08 owing to surge in inflation and
RBI's tight monetary policy and the ten-year benchmark
bond yield surged to 9.28% during the beginning of Aug 08.
Meanwhile, with increase in CRR and increased absorption
of liquidity through the LAF operations, tight liquidity
conditions were observed in the banking system. The
increase in capital outflows especially from the equity
markets had put significant downward pressure on the
rupee value. This in turn led to RBI intervention in the forex
market through dollar sales to support the falling value of
rupee and thereby adding to the tight liquidity conditions.
Consequently, call rates surged to 9.0% during Jul 08 and
remained above this level for most part of Aug 08. Given
the monetary tightening measures, banks announced a
hike in their lending rates, increasing the cost of credit for

4
Economy Outlook 2009-10

Money & Finance

system and added to the liquidity pressures. Tight liquidity
Call Rates conditions in the banking system was evident from
20
18
Intensified global financial crisis firming up of call rates to 19.74% (weighted average call
increases liquidity crunch in the
16 rates) on October 10, 2008 and increasing recourse to LAF
RBI idity in

domestic markets
liqu

window by banks.
mea to th

14
sure
%

12
s in system

Alongside, economic activity slowed down due to high

fuse
e

10
domestic interest rates, lack of fund availability, waning
s

8
6 domestic demand, and recessionary conditions in
4 developed world. While the average growth in IIP during
Q3FY09 turned negative to -0.2%, growth in exports
4-Jan-08
25-Jan-08
15-Feb-08
7-Mar-08
28-Mar-08
18-Apr-08
9-May-08
30-May-08
20-Jun-08
11-Jul-08
1-Aug-08
22-Aug-08
12-Sep-08
3-Oct-08
24-Oct-08
14-Nov-08
5-Dec-08
26-Dec-08

declined by -7.66% during the same period. Moderation in

inflation seemed to be the only respite during this period.
Source: CCIL With increase in downward risks to the growth prospects
of the economy and some moderation in inflation, the
companies as well as households. High interest rates did focus of monetary policy shifted from inflation control to
not deter credit off take of banks, which continued to grow stimulating growth and easing liquidity pressures. Thus, in
at a rapid pace because other sources of funds had an endeavour to maintain domestic macro-economic and
depleted. According to the sectoral data available till Aug financial stability amidst turmoil in the global financial
29, 2008, 45% of incremental non-food credit (y-o-y) was markets, the RBI announced a slew of measures, which
absorbed by industry as compared with 40% in the included cut in CRR, Repo rate and reverse repo rate by 400
corresponding period of previous year. Although bank bps, 350 bps and 200 bps respectively during Oct 08-Jan
credit to industries grew at a rapid pace during that time, it 09. With RBI signalling towards lower interest rates, banks
was not sufficient to service the entire demand for funds lowered their lending rates. As a result, the PLR declined to
emanating from the corporate sector. Given the bearish 12.50-13.25% in Dec 08 from 13.00-13.50% during Nov 08.
sentiment prevalent in the domestic as well as Also, call rates eased significantly to 5.28% by end
international financial market coupled with increased risk December 2008 as cut in CRR and other measures taken by
aversion among investors on account of global financial the RBI infused significant liquidity into the system.
crisis, raising funds from equity and bonds markets had
become difficult for the corporates. A sharp decline in domestic inflation as well as global
crude oil prices coupled with easy monetary policy stance
Global financial woes intensified significantly in Sep 08, followed by RBI provided impetus to bond prices. The 10-
with the collapse of Lehman Bros and bankruptcy of some year benchmark bond yield fell to 5.25% by the end of the
other big financial institutions. The financial distress year. Although the easy liquidity conditions were observed
caused thereby was characterised by severe credit freeze in the banking system and lending rates were lowering,
and crisis of confidence worldwide. The substantial FII credit off take saw some moderation during Dec 08. This
outflows from domestic stock markets coupled with tight can in part be attributed to slackening demand conditions
monetary policy followed by the RBI till Aug 08 led to and increased risk aversion on part of banks as downside
significant liquidity crunch in the money market. risks to economic activity were on the rise. Although the
Meanwhile, FII outflows from equity, increased dollar cut in policy rates is likely to help the corporate sector to
demand by oil importers (due to surging oil prices) and some extent, given the subdued domestic demand
strengthening of dollar against other major currencies conditions and weakening exports, the economy is
exerted significant downward pressure on rupee value. In unlikely to revive at least in the short run.
order to arrest further fall in rupee value, the RBI
intervened in the forex market by way of dollar sales, which
in turn resulted into absorption of liquidity from the

5
Economy Outlook 2009-10

Price Scenario
From the fear of high inflation to the early signs of deflation
During the first eight months of 2008, the major concern
on the price front was the unprecedented rise in WPI WPI Inflation of fuel, power, light & lubricant
inflation. A major breather came towards the end of 2008,
20
as prices started moving southwards. However, at this % Y-O-Y Growth
18
16
juncture, another concern that started emerging was that 14
12
of a possible deflation - with prices of certain commodities 10
8
slipping into a negative territory. The inflationary 6
4
pressures that had gradually started building up since Dec 2
0
07 were primarily driven by supply-side bottlenecks, which -2
Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

were observed in the international as well as domestic
markets. Unprecedented rise in global commodity prices
(especially crude oil) that caught the entire world
unawares had also cascaded to India. Therefore, the year
2008 witnessed significant monetary tightening by the
RBI accompanied by fiscal measures by the Government in
a bid to contain rising inflation. The policy stance, however,
changed during the last three months of 2008 as inflation
rate began to ebb in tandem with receding global
commodity prices.
At the start of the year, surge in food and fuel prices placed
inflationary pressures on several commodities, causing the
WPI inflation to breach the 4% mark. A potential threat,
however, was the steady rise in oil prices. The unabated rise
in global oil prices and the resultant increase in under
recoveries of oil companies and fiscal burden (due to
issuance of oil bonds) necessitated the Government to
increase the domestic prices of petrol, diesel and LPG twice
within a span a five months. The Central Government
decided to increase domestic fuel prices first in Feb 08
WPI Inflation
14
12
% Y-O-Y Growth
Dec-08
Source: Ministry of Commerce
(Feb 14, 2008) and then subsequently in Jun 08 (Jun 4,
2008) when the prices of international crude oil crossed
US$ 100 and US$ 130 per barrel mark, respectively. This
added to the inflationary pressures in the economy,
causing WPI inflation to cross the RBI's tolerance level of 5-
5.5% in mid Feb 08 and by Jun 08, inflation was at a double-
digit level. Inflation fuel group also surged from 3.78% in
Jan 08 to 16.28% in Jun 08. Inflation continued its march
northwards and reached its peak of 12.72% (a figure last
seen in April 1995) during Aug 08 as the second round
impacts of the oil price hike began to unfold.
The fuel price hike led to an increase in input costs and
transport costs for both the agricultural and industrial
sectors. Prices of industrial fuels such as naphtha and
bitumen, (which are not subsidised) also soared. Fertiliser
prices also spiked owing to higher prices of raw materials
such as, natural gas, fuel oil and naphtha, in turn putting
an upward pressure on prices of agricultural commodities.
Demand-supply imbalances coupled with the knock-on
12.7
effects of increase in fuel prices led to a spurt in Food
articles inflation to 6.56% in Aug 08 from 2.1% in Jan 08.

10 8.8
The prices of Non-Food articles also soared, thereby
8
causing the Primary articles inflation to rise from 4.0% in
6 4.9
Jan 08 to 11.0% in Aug 08.
4

2 Price of Manufactured products also witnessed

0 perceptible increase in 2008 owing to steep rise in prices of
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
basic metal alloys and alloy products and food products
Source: Ministry of Commerce (particularly edible oil & oil cakes). Manufacturing

6
Economy Outlook 2009-10

Price Scenario
Inflation in Major Categories WPI Inflation of Edible Oil & Oil Cakes
13.5

11.5
55 52.1
% Y-O-Y Growth

9.5 50

% Y-O-Y Growth
45
7.5 40
35
30
5.5 25
19.4
20
3.5 15
10
2.6
1.5 5
0
-5 -5.5
-0.5
Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

-10 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Primary Articles Fuel Group Manufactured Products WPI of Oil cakes (wt 1.42) WPI of Edible oils (wt 2.76)

Source: Ministry of Commerce Source: Ministry of Commerce

inflation more than doubled to reach 11.7% in Aug 08 from from Dec 6, 08), the fuel group inflation plummeted to a
4.15% at the start of the year. The contribution of Basic territory of deflation during Dec 08.
metal alloys and alloy products to overall inflation surged
In tandem, inflation in manufactured food products also
from 5.5% in Jan 08 to 15.0% in Aug 08.
fell from 13.75% during Sep 08 to 3.74% during Dec 08, led
In response to mounting inflationary pressures, monetary by WPI of oil cakes which also entered into deflation (WPI
tightening measures were adopted by the RBI in order to for oil cakes fell from a high of 52.08% in Jun 08 to -5.48% in
curb inflationary expectations. The Central Government Dec 08). This in turn dragged inflation in manufactured
also took various measures such as increasing food products to 6.85% in Dec 08 (as against 10.86% during
procurement, ban on export of some commodities, the Sep-08). However, there has been no respite from the
suspension of futures trading in soya oil, chana, rubber, surging prices of Primary articles. WPI for primary articles
potato as well as various fiscal incentives to raise supplies has in fact surged to a high of 12.26% during Oct 08, led by
of steel and cement, etc in order to curb inflationary rising primary food article prices, and still remains at
pressures. elevated levels (11.91% in Dec 08).

From Aug 08, global commodity prices started receding Given that the impact of fiscal measures taken by the
and this provided some respite to the overall price Government to rein in prices is likely to come into effect
situation in the economy. Thus, driven by receding with a lag, prices of primary food articles are expected to
international commodity prices viz., crude oil (global oil moderate after a couple of months. This coupled with the
prices plunged to US$ 53.24 during Nov-08 from a peak of better production prospects for the Rabi season is
US$ 147 per barrel during Jul-08), metals and food articles, expected to moderate inflation in primary food articles in
the headline inflation began to moderate since Sep 08. It the near future. This apart, the recent cut in prices of petrol
receded from its above 12.0% level to touch 6.43% during and diesel (Dec and Jan 08) as well as a 4% cut in ad
Dec 08. With declining global oil prices, prices of imported valorem Cenvat rate might result in price reduction across
mineral oils, particularly aviation turbine fuel, naphtha the board. In fact, rapid deceleration in WPI in the last few
and furnace oil (which are not administered) also months and with some of the commodities expected to
witnessed a substantial decline. The significant witness deflationary trends, concerns of deflation in the
moderation in mineral oil prices led to a reduction in fuel headline inflation looms large in the near term.
group inflation. Inflation in minerals oil declined to -1.60%
in Dec 08 from the high levels of 27.5% in July 08. Further,
with the sustained fall in global oil prices and the cut in
prices of petrol and diesel by the Government (effective

7
Economy Outlook 2009-10
External Sector
From a realistic export target of US$ 200 bn to missing it by a few miles
The year that passed witnessed extreme volatility in
commodity prices, especially in global crude oil, sharp
movement in exchange rate, as the rupee appreciated
during the initial months and depreciated steeply since
May, and a financial crisis that dented global growth.
Predictably, these factors carried mixed implications for
India's external sector.
During the first eight months of 2008, India's merchandise
trade remained resilient, with imports growing at a higher
rate than exports. The government set an export target of
US$ 200 bn for FY09 taking into account the robust growth
in trade; however, the unexpected turn of events that have
changed the course of exports make this target seem
implausible. During the first four months of 2008,
exporters had to endure lower realisation in rupee terms
due to steep rupee appreciation; although the rupee
depreciated thereafter, exporters could not reap benefits
of the same because the global financial crisis had by then
ramified into a global economic crisis. Demand conditions
turned weak amongst India's key trading partners and the
global economy witnessed a crisis of confidence. India's
exports lost momentum since Sep 08 and declined for the
consecutive months of Oct , Nov and Dec 08.
Further, import growth also witnessed moderation (but
less than exports) during the same period reflecting the
slowdown in the Indian economy as well. As imports grew
more than exports it led to widening of the trade deficit
which in turn exerted pressure on the current account
balance. Further, led by record net outflows in portfolio
investment reflecting the impact of global financial
turmoil, BOP recorded a deficit during the second quarter
of FY09.
Exports, in fact had registered a robust growth of 35.7% (in
dollar terms) during Jan-Apr 08 as compared with 18.37%
during the same period last year. However, this period of
rapid growth in exports in dollar terms was marked by
appreciation of rupee leading to a decline in export
realisation in the rupee terms which not only dented the
profitability of the exporters but also eroded their
8
competitiveness. In rupee terms exports increased by just
24.59% (y-o-y). The decline in export earnings affected
many exporters from sectors such as textiles and
garments, agricultural products, engineering goods and
chemicals.
In view of the fact that the rupee which was already
appreciating since last year and was expected to further
strengthen during the course of the year, the Central
Government announced an extension of certain
incentives under the Annual Supplement to Foreign Trade
Policy, 2008 in order to soften the impact of rupee
appreciation on exports. Some measures that were
envisaged to provide support included: extension of
interest rate subvention to sectors affected by rupee
appreciation and to SMEs for one more year; extension of
income tax benefit for one more year beyond 2009, and
cutback in customs duty from 5% to 3% payable under
Export Promotion Capital Goods Scheme (EPCG).
Meanwhile, exporters had taken recourse to the forwards
market to cover their contracts, which were either US$
denominated or in currencies other than the US$, to hedge
against currency risk. However, due to a turnaround of
market conditions - a rise in oil importer-led dollar demand
amidst surging global crude oil prices, huge FII outflows
and a bearish trend witnessed in the domestic stock
markets and strengthening of the US Dollar against major
global currencies – the rupee witnessed a steep
depreciation since May 08, even touching a five year low of
50.65 (intra-day) during Dec 08.
Export in Dollar Terms vs Rupee Terms
50
% Y-O-Y Growth
40
30
20
10
0
-10
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
-20
Dollar terms Rupee terms
Source: Ministry of Commerce
Economy Outlook 2009-10

External Sector
During May-Dec 08, the rupee had in fact depreciated by Oil & Non-Oil Imports (US$ Terms)
19.85%. Although it provided some cushion to exporters, it
might have minimised the positive impact for those who 140

% Y-O-Y Growth
120
had hedged their foreign currency exposure. 100
80
60
Although export growth moderated since May, it 40

continued to be healthy till Aug 08. During May-Aug 08, 20

0

Dec-08
Jan-07
Feb-07

Mar-07

Apr-07

May-07

Jun-07
Jul-07

Aug-07

Sep-07
Oct-07

Nov-07
Dec-07

Jan-08

Feb-08
Mar-08

Apr-08

May-08

Jun-08

Jul-08
Aug-08

Sep-08
Oct-08
Nov-08
exports grew by 27.32% (US$ terms) as against 18.04% -20
-40
during the same period last year; however, export growth
during May 08 dropped to 27.62% as compared with Petroleum crude & products imports Non-POL items imports

45.72% during Apr 08. This significant slowdown could

Source: CMIE
probably be attributed to the anti-inflationary measures
taken by the government such as export ban on certain almost 88.18% during the Jan-Aug 08 as compared to
commodities like non-basmati rice, pulses, edible oils etc. 14.02% registered during the same period last year. On the
In the meanwhile potential inflationary pressures other hand, non-oil imports which was reportedly growing
resulting from the firming up of international energy, food during Jan-Mar 08, witnessed a deceleration in growth by
and agricultural raw material prices globally which had 23.26% during Apr-Aug 08 from 43.63% during Apr-Aug 07
started surfacing since Jan 08 was then a growing concern mainly due to decline in the imports of gold and silver and
for the Indian economy. pearls, precious and semiprecious stones, iron and steel
and electronics goods.
Given the fact that the developed economies were going
through financial turbulence since beginning of the year, Thus, despite growth achieved in exports, increasing
India's export growth did remain healthy till August 08. growth in imports led to widening of the trade deficit.
India's attempts to diversify its export markets towards While India's trade deficit had been widening since the
the Asian countries could have helped in mitigating the beginning of the year, especially since Apr 08, it touched a
impact of a slowdown in exports to developed countries. record high of US$ 13.94 bn during Aug 08. Widening trade
deficit led to a high current account deficit during Jan-Sep
At the same time burgeoning global commodity prices had 08, despite higher net invisibles accrued during the year
also started impacting India's import bill. Imports grew by (Jan-Sep 08), emanating from private transfers and
an average of 43.91% (dollar terms) during Jan-Aug-08 software exports. Net invisibles surplus financed about
primarily led by oil imports. In line with the continued 67.7% of trade deficit during Apr-Sept 08 as compared with
surge in global crude oil prices, India's oil import bill rose by 74.6% during Apr-Sept 07.

India's Trade Balance Surpluses in the capital account balance were able to
70 0 offset the current account deficit and led to BOP surpluses
% Y-O-Y Growth (US$ terms)

60 -2000
50
between Jan-Jun 08; however, capital account started to
-4000
40 contract, especially since Apr 08, owing to volatile
US$ mn

-6000
30
-8000 movement of capital flows. Under net capital flows,
20
10
-10000 portfolio investment has recorded net outflows while
0 -12000
inflows under foreign direct investments (FDI) which
- -10 -14000

- -20 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
-16000
comprises of equity, reinvested earnings and inter-
corporate loans had been optimistic reflecting
Export Import Trade balance - RHS Government's continuing liberalisation measures to
Source: Ministry of Commerce attract FDI.

9
Economy Outlook 2009-10

External Sector
Current Account Balance 20 Moderating Capital Inflows 40
30
35
20 15
30
10 10
25
US$ bn

US$ bn

US$ bn
0
5 20
-10
15
-20 0
10
-30 -5 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09 5
-40 Q1 FY08 Q2 FY08 Q3 FY08 Q4 FY08 Q1 FY09 Q2 FY09
-10 0
-50
Merchandise trade Net invisibles Current account FDI Portfolio investment ECB Capital account-RHS

Source: RBI Source: RBI

Portfolio investments (primarily comprising foreign
institutional investors' investments (FIIs) and American
Depository Receipts (ADRs)/Global Depository Receipts
(GDRs)) continued to witness net outflows due to large
sales of equities by FIIs in the Indian stock market and
slowdown in net inflows under ADRs/GDRs due to drying-
up of liquidity in the overseas markets. Further, External
Commercial Borrowings (ECBs) also contracted since Apr 08
due to turmoil in the global financial markets and the
ensuing global credit crunch. Thus, during Jul-Sep 08, a
deficit of US$ 4.7 bn was seen in BOP for the first time in
three years (excluding valuation effects). This deficit which
also reflects the foreign exchange reserves have suffered
from the depreciation of major currencies including rupee
against the US dollar. As the result the valuation loss
(as calculated by RBI) amounted to US$ 20.9 bn during
Apr-Sep 08 as compared to valuation gain of US$ 8.1 bn
during Apr-Sep 07.
As 2008 drew to a close, the financial crisis turned deeper
and protracted, and its ripple effects were felt in the real
sector of various economies. In such a scenario increased
exporter’s risk on credit given to buyers further added to
the woes of the exporters. According to the Federation of
Indian Exporters (FIEO), insurance firms hiked premium
rates by 25-30% for export credit insurance covers.
Moreover unwillingness of Indian banks to accept Letter of
Credits issued by foreign banks, due to fear of default, were
also putting pressure on the Indian exporters. Conditions
seemed worse as exporters shut down their operations
and cut down jobs.
A sample study by the Department of Commerce for 121
export-related companies (for Aug-Oct 08) revealed
decline in jobs following the slowdown in some export
sectors. The deteriorating global economic environment
was manifest in the decline in exports for the consecutive
three months of Oct 08 (-12.11%), Nov 08 (-9.89%) and
Dec (-1.05%). Imports growth also moderated significantly
to 10.57% during Oct 08, 6.11% in Nov 08 and 8.85% in
Dec 08. With significant moderation in imports, the trade
deficit narrowed marginally to US$ 10.53 bn in Oct 08 and
US$ 10.06 bn in Nov 08 as compared to US$ 10.6 bn in
Sep 08 and significantly to US$ 7.6 bn in Dec 08.
In the wake of slowing demand and elevated credit risk to
exporters coupled with non availability of finance, the RBI
and the Government have taken a slew of measures to
ensure an adequate flow of credit to the exporters. These
measures, which include interest rate subvention for
labour-intensive exports, back-up guarantee for ECGC
loans to ensure exporters are not denied loans for trading
with risky markets, series of tax incentives and a refinance
facility through EXIM bank, are expected to arrest decline
in export growth. However, given the slackening demand
in overseas market, these measures are unlikely to make a
marked improvement in exports. Thus, the realistic target
of US$ 200 bn for FY09 (which was fixed at start of the year)
is feared to be missed by a few miles.

10
Indian
Economy Outlook 2009-10
Economy Outlook 2009-10

Outlook for the Indian Economy 2009-10

In the beginning of the current financial year, there was
greater optimism about India's growth prospects and D&B
believed that the strength of domestic demand,
particularly investment, would enable India to achieve a
real GDP growth of 8.5% in FY09. While due consideration
was given to the financial turmoil being witnessed in the
developed economies, India was not expected to be
seriously affected by the unfolding crisis. However, since
Sep 08, the scale of crisis intensified and its knock-on
effects were felt in the real sector. Acute liquidity crunch
and decelerated economic activity resulted in pronounced
fall in investors' appetite for risk . Developing economies,
particularly the ones who relied on exports and on global
financial markets for their financing needs also got
engulfed in the crisis. Risks to the global growth outlook
were significant and tilted firmly towards downside. In
such a scenario of changing dynamics of uncertainty, and
downside risks to the global economic growth, D&B felt
the need to revise India's growth prospects. The cyclical
downside risks to growth increased significantly during
the last few months of 2008. Therefore, D&B revised its
GDP growth forecast downwards to 8.0% in Sep 08 and
further to 6.8% in Feb 09. The downward revision is driven
largely by the following developments:
n
Investment demand losing steam
n
Heightened uncertainty in global markets
n
Waning consumption demand
n
Downtrend in industrial production
n
Slowing services sector growth
n
Slowdown in savings
n
Mounting stress on external balance
n
Uncertainty on employment front
While D&B is less optimistic about the near-term growth
households and decrease in corporate profitability.
The combined impact of lower domestic savings and
deferred capital expenditure plans by companies owing to
funding pressures will lead to moderation in investment
rate in FY10.
On the inflation front, D&B expects WPI inflation to ebb
significantly in FY10 as weak consumption demand,
significant deceleration in international commodity
prices, decrease in input costs and the high base effect
come into play. Further, a significant respite is expected on
the interest rate front, as it is expected to come down
significantly and in turn support demand growth.
On the external front, exports are likely to suffer in the
short term and are expected to miss the target set for FY09
by miles due to heightened uncertainty in global markets
and substantial slowdown in global demand; however, it is
likely to improve during H2 FY10. Stress on external
balance is likely to intensify due to mounting trade deficit.
Real GDP to grow by 6.7% in FY10
D&B believes the economy would pick up in the medium
to long term period, when lagged effects of aggressive
policy response by the Government and the RBI would
come into effect completely and some amount of stability
is restored in the external environment. D&B believes that
the strong fundamentals of the Indian economy are a key
to early reversal. D&B expects GDP growth to bottom out
during H1 FY10, see a reversal by H2 FY10 and average at
6.7% for FY10.
Real GDP Growth
10.0
9.8
9.5 9.5
% Y-O-Y Growth

prospects, D&B believes the economy would pick up in the 9.0 9.0

medium to long term period. Consumption demand is 8.5 8.5

expected to receive a boost once the lagged effects of the 8.0

7.5
aggressive policy responses by the Government and the 7.5
7.0
RBI start unfolding. Rise in consumption demand will in 6.8
6.7
6.5
turn provide some fillip to industrial production, going FY04 FY05 FY06 FY07 FY08 FY09 F FY10 F
forward; however, savings rate will shrink primarily due to F : Forecast

erosion in value of physical and financial assets of Source: CSO and D&B Research

12
Economy Outlook 2009-10

Outlook for the Indian Economy 2009-10

Sectoral GDP Growth in PFCE
12.0
10.9 9.0
10.0 9.5 8.5 8.1
8.1
% Y-O-Y Growth

8.3
8.0
8.0

% Y-O-Y Growth
7.5
6.0 5.5 6.8
4.9 7.0 6.4
4.6 6.5
6.5 6.7
4.0
2.9
6.0
2.0 5.5
1.1 5.5

0.0 5.0
FY08 FY09F FY10F FY05 FY06 FY07 FY08 FY09F FY10F
Agriculture Industry Services F: Forecast F: Forecast

Source: CSO and D&B Research Source: CSO and D&B Research

D&B expects the industrial GDP growth to average at 4.6% monetary and fiscal measures aimed at stimulating
during FY09, significantly lower than 8.1% in FY08. Further, demand. D&B expects the aggregate consumption
on account of improvement in demand during H2 FY10, demand as measured by Private Final Consumption
industrial GDP growth is expected to improve and average Expenditure (PFCE) to moderate to 6.5% during FY09 as
at 5.5% during FY10. Growth in services sector GDP is also compared with 8.1% in FY08. However, PFCE is expected to
expected to slowdown to single digit level of 9.5% in FY09 improve slightly to 6.7% in FY10 as fiscal measures and
mainly owing to poor performance of trade and financial lower interest rates begin to boost confidence and
sectors. However, services sector GDP growth is projected stimulate demand in latter half of FY10.
to decelerate to 8.3% for FY10 as the lagged effects of
slowdown in the industrial sector on services intensify.
Industrial production to pick up in H2 FY10
Though the service sector growth will stagger, it is D&B expects growth in industrial production to be around
expected to register the highest growth within the three 3.5% during FY09 as compared with 8.5% during FY08.
broad sectors of the economy; as a result, the service sector
will retain its importance in GDP and its contribution is However, industrial production is expected to improve
expected to increase from 55.7% in FY08 to 58.0% in FY10. during H2 FY10 and register an average growth of 5.3%
during FY10 on account of:
Domestic Consumption to Drive Growth in the
n
Rise in domestic demand
Recovery Phase
n
Stability in export demand
Consumption demand is likely to be restrained in the near n
Faster implementation of infrastructure projects that
future in view of
IIP Growth IIP
n Increasing uncertainty on the employment front 14.0 to gro
up exp wth
tu er ex
n Decline in income growth
% Y-O-Y Growth

12.0 rn ien pe
in ce ct
H2 ed
10.0
n Significant slowdown witnessed in labour-intensive FY
10
8.0
sectors, especially SMEs and export- oriented sectors
6.0
n Significant erosion in value of financial and physical 4.0
assets 2.0
0.0
Declining income growth, negative wealth effect and FY04 FY05 FY06 FY07 FY08 P FY09 F FY10 F
cautious consumer as well as business sentiments are F : Forecast P : Provisional
likely to limit the positive near term impact of the
Source: RBI and D&B Research

13
Economy Outlook 2009-10

Outlook for the Indian Economy 2009-10

n
Lower domestic savings
40 Savings Rate
n
Funding pressures (as various avenues for funding dry
37.7
38 up including bank credit)
35.7
36
Bank Credit to Moderate
%

34.2
34 33.0 32.8
31.7
32 D&B forecasts the bank credit growth to moderate
30 29.8 to around 21.5% by end of FY09 and then to 20.0% by end
28
of FY10.
FY04 FY05 FY06 FY07 FY08 E FY09 F FY10 F

F: Forecast E: Estimate Bank Credit

40

Source: RBI and D&B Research

35
37.0
30.9
are in pipeline and increase in the developmental
% Y-O-Y Growth

30
28.1
expenditure by the Government in FY10 25
21.5
22.3 20.0
20
Savings Rate to Shrink 15.3
15

D&B expects the domestic savings rate to moderate to 10

FY04 FY05 FY06 FY07 FY08 FY09F FY10F
33.0% and further to 32.8% during FY09 and FY10
F: Forecast
respectively from around 37.7% in FY08.
Note: Data pertains to last reporting Friday of March
Factors that would weigh down on domestic savings are: Source: RBI and D&B Research
n Lower corporate profitability D&B expects the momentum in the bank credit growth to
n Significant widening of fiscal deficit slowdown on account of:
n Erosion in value of financial and physical assets n Increase in risk aversion of banks
n Lower demand for bank credit by industry due to
Investment Rate to Moderate production cuts and deferred investment plans
D&B expects investment rate to moderate to 35.5% in n Deferred consumption of high-end consumer product
FY09 and further to 35.0% in FY10 from 39.1% in FY08. and lower demand for home loans.
Investment rate would be hampered owing to:
Interest Rates to Lower Significantly
n
Deferment of capital expenditure plans by companies
D&B expects Prime Lending Rate (PLR) to soften and stand
Investment Rate
41.0
Interest Rate and Money supply
39.1
39.0
36.9 Variables (End Period) FY08 FY09 F FY10 F
37.0 35.5 35.5 35.0
%

35.0 PLR (%) 12.25-12.75 11.75-12.25 10.50-11.00

33.0 32.1

31.0
15-91 days'
Treasury Bill (yield) 7.09 5.20 4.90
29.0 27.6
27.0 10 Year G-Sec (yield) 7.91 6.90 6.00
25.0
FY04 FY05 FY06 FY07 FY08 E FY09 F FY10 F
M3 (growth Rate %) 20.8 18.5 17.5
F: Forecast E: Estimate

Source: RBI and D&B Research Source: RBI and D&B Research

14
Economy Outlook 2009-10

Outlook for the Indian Economy 2009-10

at 11.75–12.25% by end of FY09. The lending rates are
expected to come down further during FY10, as the
aggressive monetary easing measures undertaken by the
RBI since mid-Sep 08 would have injected sufficient
liquidity into the system and would drive down interest
rates. Moreover, the decline in inflation rate will provide
more flexibility to the RBI to further ease its monetary
stance, thereby signalling towards lower interest rate
regime. D&B expects the PLR to stands at 10.5-11.0% by
end of FY10.
The 10-year G-sec yield is also expected to drop to 6.9% by
end FY09 and then to 6.0% by end of FY10 as significant
reduction in inflation and rate cuts by the RBI would buoy
the sentiments in the G-sec market. Also, with weaker
demand for bank credit and rising concerns over credit risk,
D&B expect banks to park funds in the G-sec market,
thereby driving up the demand for government securities.
The pressure of high fiscal deficit on account of the fiscal
stimulus packages given in FY09 and an expected increase
in debt issuance in FY10 is likely to limit the gains in the G-
sec market.
Deflationary Trends to be Observed During Few
Weeks of FY10
D&B expects WPI inflation to average at 9.0% for FY09,
to move downwards thereafter and to average at around
3.0% during FY10 as factors such as weak consumption
demand, significant deceleration in international
commodity prices (especially crude oil), decrease in input
costs (which will induce reduction of final product prices)
and the high base effect come into play. D&B also expects
to witness a deflationary phase during the first few weeks
of Q1 FY10.
Stress on External Balance Likely to Increase
D&B expects exports to be around US$ 178 bn in FY09,
which is approximately US$ 22 bn lower than the
Government’s target, owing to economic downturn
witnessed in India's key export markets. D&B, however,
expects exports to witness some revival during the second
half of FY10, when the world economy begins to stabilise.
D&B expects exports to grow around 14% to US$ 203 bn
during FY10.
Imports, on the other hand, are expected to be around US$
300 bn in FY09 and are likely to increase further to US$ 353
bn in FY10, as demand will pick up in the Indian economy
during latter part of FY10. Imports are expected to grow
at 17.7% during FY10, which is lower as compared to 25.0%
(estimated) during FY09.
D&B expects the trade deficit to increase to US$ 122 bn in
FY09 and further to US$ 150 bn in FY10, as growth in
imports is expected to be greater than exports. Further the
current account deficit would surge to 2.6% of the GDP in
FY09, as trade deficit is expected to be high and is not likely
to be offset by higher invisibles receipts (due to lower
private transfers as well as lower services exports). D&B
expect the current account deficit to be around 2.2% of
GDP in FY10 as invisible receipts are expected to pick up

WPI Inflation 400 External Trade -10

350 -30
US$ bn
10 300 -50
9 9.0
250 -70
% Y-O-Y Growth

8
7 200 -90
6.5 5.4
6 150 -110
5 5.5
4.6 100 -130
4
4.4 50 -150
3 3.0
2 0 -170
FY04 FY05 FY06 FY07 FY08 FY09 F FY10 F
FY04 FY05 FY06 FY07 FY08 FY09 F FY10 F

F : Forecast
Export - LHS Import - LHS Trade Balance - RHS F : Forecast

Source: RBI and D&B Research Source: RBI and D&B Research

15
Economy Outlook 2009-10

Outlook for the Indian Economy 2009-10

once the external environment stabilises by the latter half Exchange Rate
of FY10. 51.0
49.5
49.0
Rupee to Rally from the Current Levels
47.0 46.5

Re/US$
D&B forecasts the rupee value to be around 49.5/US$ by 45.0 44.6
the end of FY09. The rupee is expected to appreciate in the 43.4 43.8
43.0 43.6
next fiscal and to be around 46.5/US$ by the end of FY10.
41.0
On an average, rupee is expected to be around 45.90/US$
40.0
during FY09 and 47.50/US$ during FY10. The appreciation 39.0
FY04 FY05 FY06 FY07 FY08 FY09F FY10F
in rupee in next fiscal (towards end) would be on account
F : Forecast
of an expected fall in value of US dollar and resumption in
the FII inflows as the global economy begins to stabilise Note: Data pertains to end of the financial year
Source: RBI and D&B Research
during the latter part of FY10.

Some Concerns to Growth

With India's increasing integration with the global
economy, we remain more susceptible to the volatilities in
the world markets for currency, commodity and finance.
Our prognosis of the overall economic scenario should
therefore be assessed with due consideration being given
to certain developments - domestic as well global. One of
the key concerns to growth prospects would be an
extended global credit crunch. If the stress in global
financial markets does not abate by the end of 2009, or if
there are other big surprises in terms of financial sector
write-downs, key economic activities will be further
impacted. In addition to risks related to persistent financial
stress, declining consumption in developed economies and
the risks of rising protectionism could significantly weigh
down our export and this will in turn feed through to limit
Indian companies' production and employment. While the
upside risks to inflation outlook have diminished lately as
commodity prices have retreated from its record highs, any
shocks to oil prices (in the event of geo-political tensions
and expected cut in oil production by OPEC) could stoke
price pressures on crude oil.
In addition to threats stemming from unforeseen
developments in the global environment, there are certain
domestic concerns as well. Foremost amongst them is the
mounting stress on the Centre's fiscal position. There has
been a significant growth in expenditure of the Central
Government owing to growing off-budget liabilities,
enhanced expenditures on subsidies, loan waivers,
salaries, infrastructure projects. Moreover, the
Government is expected to suffer revenue losses as the
economic slowdown takes hold. Cuts in excise and
customs duties done to provide relief to the demand
constrained economy will significantly lower tax
collections. The Goverment fiscal deficit will therefore be
considerably higher than the budget estimate.
The additional government expenditure is likely to place
upward pressure on interest rates and has the potential to
crowd out private investment, particularly at a time when
the economy starts reviving and investment demand
begins to increase. Secondly, in the event of poor
monsoons, agricultural growth will be impacted to a large
extent. Apart from the significant (and lagged) effect on
industrial sector performance, the monsoon effect could
feed into WPI figures through higher food and primary
articles prices.

16
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