The output growth of the Indian economy has started to consolidate around the trend
after a sharp recovery and the headline inflation also shows signs of peaking off. Going
forward, various forward looking surveys conducted in the recent period suggest strong
y-o-y growth. The Industrial Outlook Survey of the Reserve Bank also points to
continuation of the growth momentum. The professional forecasters’ survey of the Reserve
Bank registered a marginal upward revision in the GDP growth rate for 2010-11, on the
back of higher growth forecasts for agriculture and services sector. The overall outlook
suggests that notwithstanding some recent moderation in headline inflation, the level of
inflation remains above the comfort level. The Reserve Bank’s policy stance is likely to
be shaped by dual goals of maintaining the growth momentum in an atmosphere of
global uncertainty, while striving to moderate inflation further.
VII.1 The robust recovery of the Indian
economy since the second half of 2009-10
continued in the first quarter of 2010-11,
mainly on account of buoyancy in the
services sector and better performance of
the agriculture sector. Even though the pace
of growth of industrial sector was volatile,
it remained in double digits (except in June
and August 2010), thereby supporting the
overall growth momentum. The business
expectations surveys show an optimistic
picture about the outlook. The Industrial
Outlook Survey of the Reserve Bank
indicates improvement in business situation for the assessment quarter (July-September
2010) as well as the expectation
quarter (October-December 2010). The
professional forecasters’ survey also echoes
this optimism.
Business Expectations Survey
VII.2 The forward looking surveys
conducted by various agencies generally
show significant y-o-y gains, though some
of the surveys registered moderate decline
in business expectations on a q-o-q basis
(Table VII.1).
Table VII.1: Business Expectations Surveys |
Period/Index |
NCAER Mastercard
Business Confidence
Index Sept. 2010 |
FICCI Q1:2010-11
Overall Business
Confidence Index |
Dun & Bradstreet
Q4: 2010 Business
Optimism Index |
CII Oct-Dec.
2010-11 Business
Confidence Index |
1 |
2 |
3 |
4 |
5 |
Current level of the Index |
162.1 |
71.9 |
163.5 |
66.2 |
Index as per previous survey |
155.9 |
74.8 |
150.0 |
67.6 |
Index levels one year back |
143.7 |
67.2 |
143.2 |
66.1 |
% change (q-on-q) sequential |
4.0 |
-3.9 |
9.0 |
-2.1* |
% change (y-on-y) |
12.8 |
7.0 |
14.2 |
0.2** |
* : Percentage change over the previous survey.
** : Percentage change over October-March 2009-10 Survey. |
VII.3 All the four components of the
business confidence index of the NCAER
survey have shown remarkable
improvement over the previous quarter,
with the investment climate recording
highest improvement compared with the
previous round. At the sectoral level,
consumer durables, consumer nondurables,
intermediate and capital goods
have shown increase in business optimism
in the most recent round over the previous
round.
VII.4 The Business Confidence Survey
of the FICCI for the Q1:2010-11, suggests
that 78 per cent of the companies felt that
the overall economic conditions vis-à-vis
last six months are ‘moderately to
substantially’ better. Going ahead, around
72 per cent of the companies foresee an
improvement in overall economic condition
in the coming six months. The overall
business confidence index, however,
recorded a decline over the previous quarter
on account of decline at three levels viz.,
economy, industry and firm. The outlook
for jobs has also been somewhat dormant,
with about 64 per cent of the participants
saying that they will maintain employment
levels in their firms.
VII.5 In the Dun and Bradstreet
Business Optimism Index (BOI) five out
of the six optimism indices viz., volume
of sales, net profits, new orders, inventory
levels and selling prices have registered an
increase as compared to the previous
quarter. Only employee level remained
unchanged. The survey findings mention that the expected moderation in inflation
might provide some respite to the
consumers, thereby supporting domestic
cosumption demand.
VII.6 The CII Business Confidence Index
(CII-BCI) for October-December 2010-11
registered a decline over the previous
survey. In the present survey, 70 per cent
of the respondents indicated that exports
may increase.
VII.7 The seasonally adjusted HSBC
Markit Manufacturing Purchasing
Managers’ Index (PMI) increased at the
slowest pace in last ten months in
September 2010, mainly reflecting slower
growth in output and new orders. On the
downside, the employment levels have
remained stagnant since June 2009. Rising
raw material prices drove the fast rise in
input prices, leading to output price
inflation. Notwithstanding the recent fall,
the index has remained in the above neutral
territory (i.e., above 50) since April 2009.
VII.8 Even though the pace of growth in
the HSBC Markit Services PMI showed a
moderation in September 2010, it continued
to point to a substantial expansion of
services sector output. The pace of new
hiring in the services sector slowed down,
though it remains in positive territory.
Reserve Bank’s Industrial Outlook
Survey
VII.9 The 51st round of the Industrial
Outlook Survey of the Reserve Bank conducted during July-September 2010,
based on a sample of 1,403 companies,
showed an improvement for the assessment
quarter (July-September 2010) as well as
expectations for the October-December
2010 quarter. Moreover, both indices (i.e.
assessment about the current quarter and
expectation about the next quarter)
remained in the growth terrain (i.e. above
100, which is the threshold that separates
contraction from expansion) (Chart VII.1a).
The findings of the survey are consistent
with that of other surveys (Chart VII.1b).
VII.10 The Industrial Outlook Survey
shows that the Indian manufacturers have
an optimistic view about improvement in
demand conditions viz. production, order
books, capacity utilisation, exports and
imports for both the assessment and
expectation quarters, compared to previous quarter and the corresponding quarter a year
ago. However, inventories are seen to be
piling up for both the quarters under review.
This indicates that part of the double digit
growth in IIP was the result of inventory
build-up, which may not persist, going
forward. Manufacturers’ pricing power was
evident from expectations about higher
selling prices. On the employment outlook,
Indian manufacturers are expected to be net
hirers (Table VII.2).
Survey of Professional Forecasters1
VII.11 The results of the thirteenth round
of ‘Survey of Professional Forecasters’
conducted by the Reserve Bank in
September 2010 shows a marginal upward
revision in the overall (median) GDP growth
rate for 2010-11 from 8.4 per cent to 8.5 per cent, mainly on account of upward revision
of the growth forecast of agriculture and
services sector (Table VII.3).
|
Table VII.2: Reserve Bank's Industrial Outlook Survey -Net Response on
Expectations and Assessment about the Industrial Performance |
Parameter |
Optimistic
Response |
Oct-Dec
2009 |
Jan-Mar
2010 |
Apr-Jun
2010 |
July-Sept
2010 |
Oct-Dec
2010 |
E |
A |
E |
A |
E |
A |
E |
A |
E |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
1 Overall business situation |
Better |
39.8 |
36.0 |
44.9 |
43.1 |
41.2 |
40.7 |
41.5 |
38.7 |
47.5 |
2. Overall financial situation |
Better |
33.5 |
29.5 |
39.3 |
35.8 |
36.3 |
32.2 |
34.1 |
30.6 |
39.6 |
3. Working capital finance requirement |
Increase |
30.4 |
28.8 |
32.7 |
30.5 |
27.7 |
29.9 |
31.1 |
29.3 |
34.8 |
4. Availability of Finance |
Improve |
26.1 |
23.0 |
29.2 |
25.7 |
26.8 |
26.4 |
28.5 |
26.6 |
31.3 |
5. Cost of external finance |
Decrease |
|
-14.7 |
-18.3 |
-15.9 |
-20.6 |
-21.9 |
-23.3 |
-28.3 |
-28.3 |
6. Production |
Increase |
35.0 |
28.9 |
40.0 |
36.5 |
35.9 |
35.4 |
40.2 |
40.0 |
49.1 |
7. Order books |
Increase |
32.3 |
25.9 |
35.8 |
31.9 |
33.4 |
31.3 |
36.3 |
36.1 |
44.8 |
8. Pending orders, if applicable |
Below normal |
11.0 |
11.6 |
5.7 |
8.8 |
6.4 |
6.9 |
4.2 |
5.1 |
1.5 |
9. Cost of raw material |
Decrease |
-38.4 |
-47.1 |
-44.3 |
-60.2 |
-48.6 |
-62.7 |
-49.3 |
-58.3 |
-49.3 |
10. Inventory of raw material |
Below average |
-1.2 |
-4.2 |
-3.6 |
-5.8 |
-2.6 |
-5.0 |
-5.1 |
-5.3 |
-6.6 |
11. Inventory of finished goods |
Below average |
-3.7 |
-4.3 |
-1.9 |
-4.3 |
-2.6 |
-4.1 |
-5.0 |
-4.3 |
-2.8 |
12. Capacity utilisation (Main product) |
Increase |
22.0 |
16.5 |
25.4 |
21.7 |
19.7 |
21.1 |
26.5 |
23.3 |
32.3 |
13. Level of capacity utilisation
(Compared to the average in the
preceding four quarters) |
Above normal |
-3.8 |
-3.9 |
1.3 |
3.0 |
1.6 |
2.5 |
5.8 |
3.1 |
7.2 |
14. Assessment of the production
capacity (With regard to expected
demand in the next six months) |
More than adequate |
6.5 |
5.3 |
5.0 |
6.4 |
7.1 |
3.1 |
4.1 |
3.3 |
5.6 |
15. Employment in the company |
Increase |
8.8 |
10.3 |
12.1 |
13.7 |
13.6 |
14.7 |
16.8 |
18.7 |
21.0 |
16. Exports, if applicable |
Increase |
12.5 |
9.2 |
20.2 |
12.7 |
18.5 |
15.3 |
20.7 |
20.0 |
26.1 |
17. Imports, if any |
Increase |
11.5 |
13.0 |
16.9 |
17.1 |
17.1 |
20.9 |
21.7 |
22.0 |
22.2 |
18. Selling prices are expected to |
Increase |
6.0 |
2.6 |
9.8 |
12.4 |
13.3 |
17.3 |
15.2 |
13.8 |
17.0 |
19. Increase in selling prices, if any, is expected |
Increase at
lower rate |
19.4 |
19.3 |
16.8 |
21.6 |
19.7 |
17.4 |
14.3 |
15.2 |
13.0 |
20. Profit margin |
Increase |
-2.8 |
-9.9 |
1.1 |
-2.9 |
3.2 |
-4.8 |
3.1 |
-2.5 |
9.2 |
Note: 1. ‘Net response’ is measured as the percentage share differential between the companies reporting ‘optimistic’ (positive) and ‘pessimistic’ (negative) responses; responses indicating status quo (no change) are not reckoned. Higher ‘net response’ indicates
higher level of confidence and vice versa.
2. E: Expectations and A: Assessment
3. ‘Cost of external finance’ is a newly added question from the 48th (October – December 2009) survey round. |
Growth Projections of Different Agencies
VII.12 All available projections for GDP
growth in 2010-11 generally project an
optimistic picture (Table VII.4). Both IMF
and ADB revised their growth projections
upward for India recently.
Factors Influencing the Current Growth
and Inflation Outlook
VII.13 The economic recovery, which
became evident in the second half of
2009-10, has consolidated with further
increase in real GDP growth in the first
quarter of 2010-11. The outlook for
continuation of the robust growth
momentum derives support from the
following factors: (a) the impact of the normal monsoon on kharif output which
will be reflected in GDP growth of Q2 and
Q3, (b) possibility of continuation of buoyancy in the industrial sector,
notwithstanding the intermittent volatility,
(c) sharp rise in excise duty collections which are indicative of strong economic
activity, (d) sustained buoyancy in lead
indicators of services activities, (e) strong
growth in corporate sales, (f) improving
business environment as suggested by the
Industrial Outlook Survey of the Reserve
Bank, (g) pick-up in private consumption
expenditure and high growth in the
production of consumer durables, (h) strong
growth in non-oil imports, (i) high capital
expenditure plans of firms, (j) increase in
credit demand from the private sector and
(k) higher flow of financing from nonbanking
sources.
Table VII.3: Median Forecasts of Select Macroeconomic Indicators by
Professional Forecasters 2010-11 and 2011-12 |
|
Actual
2009-10 |
Annual Forecasts |
Quarterly Forecasts |
2010-11 |
2011-12 |
2010-11 |
2011-12 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
E |
L |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
15 |
16 |
1. Real GDP growth rate at
factor cost (in per cent) |
7.4R |
8.4 |
8.5 |
8.5 |
8.5 |
8.2 |
8.2 |
8.5 |
8.7 |
8.4 |
8.3 |
8.3 |
8.1 |
– |
8.5 |
a. Agriculture & Allied Activities |
0.2R |
4.1 |
4.6 |
3.0 |
3.2 |
4.0 |
4.2 |
6.0 |
6.5 |
3.9 |
5.1 |
3.0 |
3.2 |
– |
3.0 |
b. Industry |
10.4R |
9.0 |
9.0 |
9.1 |
9.1 |
9.3 |
9.3 |
8.7 |
8.7 |
8.4 |
7.9 |
8.7 |
8.1 |
– |
8.0 |
c. Services |
8.3R |
9.1 |
9.2 |
9.5 |
9.5 |
8.9 |
8.5 |
9.3 |
9.4 |
9.2 |
9.2 |
9.5 |
9.5 |
– |
9.6 |
2. Gross Domestic Saving (per cent of
GDP at current market price) |
– |
34.7 |
34.0 |
35.9 |
35.3 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
3. Gross Domestic Capital Formation
(per cent of GDP at current
market price) |
– |
36.0 |
36.0 |
37.8 |
37.0 |
36.8 |
36.0 |
36.3 |
35.5 |
36.1 |
37.5 |
37.3 |
36.0 |
– |
36.5 |
4. Corporate profit after tax
(growth rate in percent)* |
28.8 |
22.5 |
20.0 |
21.0 |
23.0 |
18.0 |
10.0 |
18.9 |
15.0 |
25.0 |
20.0 |
25.0 |
20.0 |
– |
20.0 |
5. Inflation WPI |
3.6 |
8.6 |
8.1 |
6.0 |
5.6 |
9.5 |
8.9 |
8.1 |
7.4 |
7.0 |
6.0 |
6.4 |
5.4 |
– |
5.9 |
6. Exchange Rate (INR/
USD end period) |
45.1 |
44.5 |
44.5 |
43.5 |
43.5 |
45.5 |
45.0 |
44.8 |
45.0 |
44.5 |
44.4 |
43.8 |
44.3 |
– |
43.5 |
7. T-Bill 91 days Yield
(per cent-end period) |
4.4 |
5.2 |
6.0 |
5.0 |
5.8 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
8. 10-year Govt. Securities Yield
(per cent-end period) |
7.8 |
7.8 |
7.9 |
7.5 |
7.9 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
9. Export (growth rate in per cent)! |
-3.6 |
15.0 |
15.9 |
16.0 |
15.0 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
10. Import (growth rate in per cent)! |
-5.6 |
17.9 |
19.7 |
15.0 |
15.7 |
– |
– |
– |
– |
– |
– |
– |
– |
– |
– |
11. Trade Balance (US$ billion) |
-108.2 |
– |
– |
– |
– |
-34.5 |
-36.5 |
-36.5 |
-38.5 |
-33.0 |
-37.9 |
-35.9 |
-37.3 |
– |
-36.9 |
E: Previous Round Projection. L: Latest Round Projection. R: Revised Estimate
– : Not Available. *: BSE listed companies. !: US$ on BoP basis.
Note : The latest round refers to thirteenth round for the quarter ended September 2010, while previous round refers to twelfth round for the quarterended June 2010.
Source : Survey of Professional Forecasters, Second Quarter 2010-11. |
Table VII.4: Agencies’ Forecast for 2010-11 |
Agency |
Latest Projection |
Earlier Projection |
Real GDP Growth
(Per cent) |
Month |
Real GDP Growth
(Per cent) |
Month |
1 |
2 |
3 |
4 |
5 |
Economic Advisory Council to the PM |
8.5 |
Jul-10 |
8.2 |
Feb-10 |
Ministry of Finance |
8.5 (+/-0.25) |
Feb-10 |
.. |
.. |
IMF (calendar year) @ |
9.7 |
Oct-10 |
9.4 |
Jul-10 |
ADB |
8.5 |
Sep-10 |
8.2 |
Jul-10 |
NCAER |
8.4 |
Oct-10 |
8.1 |
Jul-10 |
OECD @ |
8.3 |
May-10 |
7.3 |
Nov-09 |
.. : Not available.
@ at market price, while others are at factor costs. |
VII.14 Certain downside risks to growth
however remain, which include: (a)
weakening of external demand conditions,
given the recently revised outlook for
recovery in advanced economies, which
will dampen export growth, (b) real
appreciation of the exchange rate could also
weaken external price competitiveness of
Indian exports, (c) pressure from capital
inflows on the nominal exchange rate to
appreciate, (d) recent survey based
evidence of some moderation in capacity
utilisation and (e) persistent inflationary
pressures, especially in food items.
VII.15 The headline inflation, which
moderated to 8.5 per cent in August 2010,
before edging up to 8.6 per cent in
September, continues to be a cause of policy
concern and priority. The elevated levels
of food prices, with pressures emanating
from non-cereal protein-based items,
highlight the structural dimension of food inflation, which would require long-term
supply augmenting measures. Going
forward, factors which may exert upward
pressure on inflation are: (a) further
strengthening of pricing power of
corporates with the pick-up in private
demand, (b) capacity constraints in several
sectors, where supply response to high
prices could be slow, and (c) oil and
commodity prices, which have shown signs
of increase in recent months.
VII.16 Notwithstanding these risks, the
factors that may help in restraining the
inflationary pressures include: (a) a good
kharif crop, which may help in moderating
the food price inflation, (b) weak external
demand, which may increase supply in
domestic market, (c) no risk to inflation in
advanced economies due to large excess
capacity and high unemployment, and (d)
the impact of monetary policy actions
already initiated by the Reserve Bank to
contain inflation and anchor inflationary
expectations.
VII.17 An overall assessment suggests that
GDP growth is consolidating around the
trend. This growth momentum, however,
needs to be sustained through improved
investment demand, particularly in
manufacturing and infrastructure sector. The
uncertain global outlook and the dominance
of supply rigidities in certain sectors that
impart rigidity to the inflation path, pose
greater challenge for monetary policy to
anchor inflationary expectations without
hurting growth.
1 Introduced by the Reserve Bank from the quarter ended September 2007. The forecasts reflect the views of professional
forecasters and not of the Reserve Bank. |