Saturday, May 2, 2009

>Economy at glance (ECONOMIC RESEARCH)


The recently elapsed financial year witnessed major developments on the global economic
front. While the turn of the global economic cycle was confirmed at the beginning of FY 09, the impact of the slowdown, which dragged major economies of America and Europe into recession, was reflected by various indicators. The Indian economy's growth forecast of 7.1% for FY 09 represents the lowest growth rate for the last 6 years. A heightened sense of fear generated by a rising fiscal deficit and withdrawal of dollars by foreign investors took its toll on the currency. The Rupee weakened during the fiscal year, and depreciated 28% from Rs.40/USD in Apr'08 to Rs.51/USD in Mar'09. The Index of Industrial Production (IIP) decelerated 0.5% year-on-year in Jan'09 compared to 6.2% growth during the previous year. Exports for FY 09 grew at 3.6%, the slowest pace in 7 years, and markedly lower than the 29.08% growth witnessed last year. Exports for FY 09 stood at USD 169 Bn., short of the commerce ministry's revised target of USD 175 Bn., and significantly lower than the initial target of USD 200 Bn. Imports are growing, but at a slower pace, which is due not only to falling petroleum and other commodity prices, but also to waning demand in the domestic economy. Although this is a bad sign for producers, the silver lining is that the deteriorating trade deficit is
being kept in check.

The decline of inflation, which fell from 12.91% in Aug'08 to 0.26% in Mar'09, has raised fears of deflation. This prospect is worrisome because it discourages producers from continuing with their capacity utilisation and calls into question the feasibility of new projects, which facing the threat of declining revenues could be stalled. Lower capacity utilisation may result in unemployment and could further dampen the labour market, a scenario that could cause yet more damage to flagging demand and drag the economy into a slump. However, it is important to note that this deflation would not result from a real fall in demand, but on account of lower petroleum prices this year as compared to the previous year. This phenomenon is evident in the numbers for the last week of Mar'09, when although WPI inflation was at a marginal 0.26%, the index for primary articles, for example food grains, which has a weight of 22% in the WPI index, increased by 3.46%. Similarly, the index for manufactured products, which constitutes a weight of about 64% of the WPI, increased by 1.42%. However, the index for fuel & power, comprising 14% of the WPI index, declined by 6.11%, thereby forcing down the WPI. The fuel and power index decline can be attributed to the fact that crude oil, which was trading at USD 100 per barrel in Mar'08, is currently trading at USD 50 per barrel, which represents a price level last seen in 2005.

To see full report: ECONOMY AT GLANCE


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