Page 231 - DECO201_MACRO_ECONOMICS_ENGLISH

Macro Economics

Notes Growth: RBI revised its growth forecast upwards for 2010-11 at 8% with an upward bias compared
to 2009-10 figure of 7.5%. It said “Indian economy is firmly on the recovery path.” RBI’s business
outlook survey shows corporates are optimistic over the business environment. Growth in
industrial sector and services has picked up in second half of 2009-10 and is expected to continue.
The exports and import sector has also registered a strong growth. It is important to note that
RBI has placed the growth under the assumption of a normal monsoon. India could have achieved
a near 8% growth in 2009-10 itself, if monsoons were better. Table 13.2 looks at growth forecasts
of Indian economy for 2010-11 by various agencies.

Table 13.2: Projections of GDP Growth by various agencies for 2010-11 (in %, YoY)

2009-10 2010-11
RBI 7.5 with an upward 8 with an upward bias
bias
PM’s Economic Advisory Council 7.2 8.2
Ministry of Finance 7.2 8.5 (+/- 0.25)
IMF 6.7 8
Asian Development Bank 7.2 8.2
OECD 6.1 7.3
RBI’s Survey of Professional 7.2 8.5
Forecasters

Inflation: RBI’s inflation projection for March 2011 is at 5.5% compared to FY March 2010 estimate
of 8.5% with an upward bias (the final figure was at 9.9%). RBI said inflation is no longer driven
by supply side factors alone. First WPI non-food manufactured products (weight: 52.2 per cent)
inflation, increased sharply from (-) 0.4%in November 2009, to 4.7% in March 2010. Fuel price
inflation also surged from (-) 0.7 per cent in November 2009 to 12.7% in March 2010. Further,
contribution of non-food items to overall WPI inflation, which was negative at (-) 0.4% in
November 2009 rose sharply to 53.3% by March 2010. So, overall demand pressures on inflation
are also beginning to show signs. These movements were visible in March 2010 itself, pushing
RBI to increase rates before the official policy in April 2010.

Monetary Aggregates: RBI has increased the projections of all three monetary aggregates for
2010-11. These projections have been made consistent with higher expected growth in 2010-11.
Higher growth will lead to more demand for credit. Then management of government borrowing
program will remain a challenge as well. High growth coupled with the borrowing program
will need higher financial resources. Therefore, projections for money supply, credit and deposit
are raised to 17%, 20% and 18% respectively. However, higher growth in money supply would
also lead to build up of higher inflation and inflationary expectations.
There are various measures to calculate money supply. Each measure can be classified by placing
it along a spectrum between narrow and broad monetary aggregates. Narrow money includes
most acceptable and liquid forms of payment like currency and bank demand deposits. Broad
money includes narrow money and other kinds of bank deposits like time deposits, post office
savings account, etc.
Growth in M is higher than M between April and November 2009. From Dec-2009 onwards, the
3 1
growth rate in M is higher than M . The difference in M and M comes from the growth rate in
1 3 1 3
time and demand deposits. Growth in Time deposits is higher than demand deposits between
April-November 2009. From December 2009, onwards growth in demand deposits picks up.
This in turn reflects in differences in growth rate of M and M . The growth rate in currency is
1 3
volatile. It declines 15% in August 2009 and then again increases to 17.9% in December 2009.
It then declines to 15.6% in March 2010. Hence, the difference between M and M comes from
1 3
surge in growth of demand deposits and decline in growth of time deposits.

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