Fndamentals Still Strong

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: The global economic environment continues to be uncertain. The world economy, which was passing through unprecedented financial turmoil since August 2007, experienced a jolt in September 2008 when the failure of Lehman Brothers led to widespread panic across global financial markets.

The liquidity crisis that ensued not only engulfed developed markets but also quickly transmitted to emerging markets, including India. The outlook for the domestic financial markets will be determined largely by the developments in global finan-cial markets and domestic liquidity conditions

Domestic outlook

Like other emerging market economies (EMEs), India too has been affected by the global financial crisis. Real GDP growth moderated to 7.8 % in the first half of 2008-09 as against 9.3% in the first half of 2007-08. The third quarter of 2008-09 witnessed signs of further moderation in growth, especially in the industrial sector and some segments of the services sector.

Agriculture and industry

Good sowing and favourable weather conditions suggest that agricultural production during 2008-09 may be close to or better than last year’s record production. During April-November 2008, the index of industrial production (IIP) growth decelerated to 3.9% from 9.2 % a year ago. Episodes of large inventory build-up, production cuts and temporary closure in some sectors such as automobiles at the beginning of the second half of 2008-09 indicate a period of stress on account of lack of demand.

Corporate performance

During the first two quarters of 2008-09, despite high top-line growth, operating margins of the private corporate sector were eroded by higher input costs and significant drop in ‘other’ income. In light of the subsequent slowdown, industrial investment plans are slowing down, although ongoing investment projects appear to be continuing. The erosion in pricing power of corporates was reflected in rising inventories as a proportion to sales. While the downside risk to corporate profitability has increased, this may at least be partly offset by falling input prices and a gradual reduction in borrowing costs.

Business confidence

The Reserve Bank’s latest round of quarterly Industrial Outlook Survey shows weak and deteriorating business sentiment among private manufacturing companies for the last quarter of 2008-09. The survey indicates weak demand conditions and decline in sentiment for production, order books, capacity utilisation and exports. Corporates also reported a significant decline in employment expectations for January-March 2009. This picture is consistent with business confidence surveys conducted by other agencies.

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