The central government of India has kept its fiscal deficit targets on track during the first half of the current fiscal year. Revenue receipts increased substantially due to higher tax revenue and non-tax revenue. Expenditure increased at a lower rate. As a result, key deficit indicators like revenue deficit and gross fiscal deficit were significantly lower than the previous year as a percentage of GDP. Strong revenue growth was driven by economic recovery and partial rollback of indirect tax cuts, while expenditure growth remained modest. This has improved the government's fiscal position compared to the previous year.

1. TheCompanyisoneoftheoldestandlargestcivilengineeringandConstruction companyin
J India.Through outits long history Gammon has strived to achieve its motto of being
"BuilderstotheNation"withanarrayoflandmarkstructurestoitscredit,includingbridges,
pmts,harbours,thermalandnuclearpowerstations,dams,highrisestructures,chemicaland
fe1tilizerscomplexes, environment structures, cross country water, oil and gas·pipelines,
Industrystructures. Gammon haspioneered reinforcedandprestressedconcrete, Longspan
bridges,underwaterconcretingusingthecolcreteprocess,thinshellstructures,nonshrinkingconcrete,Al
uminiumtrussesforlaunchingprecastprestressedbeamsandmanymore.Over
theyearstheplanners,designers andconstruction specialist atGammon haveproved<their
competenceandinnovativeskills.Aspartofitsdiversificationstrategy,Gammonhasduringtheyear
underreviewacquiredthrough merger,AssociatedTransrailStructures Limited,a company engaged
in the business of Power Transmissions-Manufacturingand Erection, therebyincreasing
itsOperating Marginsandalsoanimprovement inEarning pershare.It has alsomade a foray into the
power sector-equipment business through acquisition
substantialinterestininternationalEuropeanbasedcompaniesengagedinthe powersector
includingmanufacturingpowerequipments.
Provisions ofquality infrastructure isacrucial prerequisite forsustainable growth ofthe economy.
The year 2008-09 witnessed an unprecedented slowdown in the ii1temational
economy,steeplyrisinginflationarypressuresemanatingfromspirallingcommoditypricesin
thefirsthalfofthefiscalfollowedbythefinancial meltdownandrecessionintheadvanced industrial
countries in the second half. The Global financial meltdown and economic recession impacted
the construction industry·dependent upon GOP growth and overall economicdevelopment
inthecountry.Allthesegmentsofconstructioni.e. infrastructure, industrial
constructionandrealestatealsowitnessedaslowdown.Weaknessintheglobal economic
environmentanditsadverseimpactontheIndianEconomyledtorenewedfocus ontheinfrastructure
sector.Thoughthegovernment introducedvariousschemestofacilitate infrastructure
facilitiesinthecountryacrossenergy,communication,transportetcsectorsin
bothurbanandruralareas,thepaceofinfrastructure growthremainedmuchlowerthanthe requirements.
AsinfrastructuregrowthhasadirectimpactonDomesticproductionwhichin tum stimulatesdomestic
production"vhichinturnsimulatesdomesticdemand anadequate
pushtotheinfrastructuresectorinthenextfew·fiscalyearsis crucialforstimulatingdomestic
demandandinvestmentandintumgrowthoftheeconomy.
'lo revive economic growth and to generate employment in the current slowdown, the govenm1ent
has putstrong impetus on infrastructw-edevelopment in the current budget..
Sustainedfocusofthegovernmenttoimproveinfrastructureespeciallyroads,power,hosing through
increasedallocation tovariousschemes suchasNHDP, BharatNinnan, ABDRP,
·JNNURM,AIBPwouldresultinstronggrowthfortheconstructionindustry.
WiththeIndianInfrastructureindustryexpectedtogrowattherateof15%intheyear2009-
10andthenewprojectsthathavebeenannounced,theconstructionsectorandconstruction
companieswillseemajorexpansionactivities.The companybeingmajorinfrastructure
contractorsinthecountrywillcettainlybenefitfromtheseexpansions.
Almostalltheinfrastructure sectorshavelinedupMegaprojectsofwhichtheConstruction
Industrycancertainlybeexpectedtobeamajorbeneficiary.
Thecompany beingoneofthemajorplayersintheconstruction sectorhasenteredintothe
BusinessofPowerProjects-Engineering, ProcurementandConstruction(EPC)basisinIndia

2. andinBangladesh.The·Compariyisparticipatinginthe.prequalificationalongwithajoint
venturePmtnerin a 3000 MW hydropowerproject(thelargestone in India)to be
constructedinArunachalPradeshandtheBogibeelSteelBridgeinDibrugarhinAssam
wherethecompanyisalreadyconstructingthesubstructure.
Transpmtation,IndustrialStructure,WaterSupplyProjectsandHydroPowerProjects.The
companyhassignificantpresenceinMiddleEastandistryingtoentertheconstruction
MarketsinLibyaforInfrastructureProjects.
TheIndianInfrastructureIndustrygrewmodestlyduringprevious year,thoughthegrowth
wasnotinlinewiththeopportunitiesthatareofferedbythegrowingIndianEconomy.The
everincreasingdemand forengineer'sskilledandunskilledworkmenonallfrontshasledto
anacuteshortageofmanpowerfortheindustryasawholeandthishasalsoaffectedthe
company.Thecompanyisalsofacingincreasingcompetitionfron1Indilli1AndInternational
Contractors.Inadditiontotheabove,theabnonnalincreasein pricesofvariousconstruction
materialsduringthepreviousyearhasfurtherincreasethepressureonmargins.Thecompany
isstrivinghardandtakingadequatemeasures inordertoincreaseitsorderwithminimum risk.
Questions:
1.Explainwhytheroleofthegovernmentisimportantforthecompany'sdevelopment?
2.Howdogovemmentsandindustriescontributetoeconomicgrowth?
3.Howdoesthegovernmentactionincreasethegrossdomesticproductofm1economy?
4.Whydowenotseeinfrastructuredevelopmentatthesamepacesalloverthecountry?
5.Howareleakagesandmultipliersaffectingthisandotherindustries,identify?
6.Doyouthinktheassessmentofthemanagementaboutthecompanyanditsprospectsare
welljustitied?

3. CaseAnalysis:Central GovernmentinControlofFiscalDeficit
CentralGovernmentfinancesduringthefirsthalfofthecurrentfiscalyearshowthatGovernmentis
well withinitstargettomeetitsbudgeteddeficit indicators.Thekeydeficit indicators inabsolute
termsaswellaspercentofGDPduring2010-11(April-September)weresubstantially lowerthanthe
corresponding periodofpreviousyear.Asproportionoftheirrespectivebudgetestimates,thelevels
weremuchlowerin thefirsthalfofcurrentfisc!yearthanthat ofthepreviousyear.Revenuereceipts
increasedsubstantially duringthefirsthalfof20I0-1I onaccountofsurgeinnon-taxrevenueand
reboundintaxrevenue.Aggregateexpenditure,ontheotherhand,increasedatalowerratedmingthe
firsthalfof20I0-1I.FinancesoftheCentralGovernmentduringApril-September20I0indicatean improvement
intermsofkeydeficit indicatorsascompared withthecorresponding periodofthe
previous year. Whilerevenue receiptsincreased substantially, the aggregate expenditure recorded ,
relativelyamodestincreaseduringtheperiod.Highergrowthinrevenuereceiptscanbeattributedto
"..i
ncreaseintaxrevenueandnon-taxrevenue.While,thehighertaxcollectionsreflectfirming upof
growthmomentum,surgeinnon-taxrevenuewasduetosubstantialmobilisationofrevenuesthrough
the 3Gspectrum and broadband wireless access (BWA) auctions. As aresult, a substantial
improvementwasevidentinrevenueaccountinApril-September20I0which,intw·n,ledtodecline
ingrossfiscaldeficit(GFD)overApril-September2009.
Major Trends
A.Deficitlndicalor:TheUnionBudget20I 0-11,announcedinFebruary20I0,startedtheprocessof
calibratedexitoffiscalstimulusmeasures.TheBudgethaspartiallyrolledbackindirecttaxratecuts
extendedduringtheperiodofslowdown.Duringthefirsthalfof2010-1I,revenuedeficit(RD)at'
74,921 croreformed1.1percentofGOP,significantlylowerthan2.6percentofGDPduringApril-·
September2009.ltmaybenotedthattheRD-GDPratiowasbudgetedat4.0percentfortheful1year
20I0-1 I. During Apri!-September 20I0, theCentral Government incurred revenue deficit to the
extentof27.1percentofbudgetestimate(BE)whilethesamewas58.4per centinApril-September
2009.ThetrendinRDaspercentofbudgetestimatesduringthefirst-halfalsoindicatesthatitwas lowerthan
theprevioustwoyears.Gross fiscal deficitfor20IO-Il isbudgeted todecline by1.2 percentagepointsofGOPto
Rs.3,81,408croreovertheprovisionalaccountsof2009-l0.Duringfthe firsthalfof20I0-
11,GFDstoodatRs.I,33,252croreandformed1.9percentofGOP,muchlower
thanthelevelof3.2percentrecordedduringthefirsthalfofpreviousyear.Aspercentofbudget estimates,
itformed34.9 percentand wasmarkedly lowerthan49.3 percent inthefirst halfof
previousyear.ThetrendinGFDaspercentofbudgetestimatesduringthefirsthalfalsoindicatesthat
itwaslowerthantheprevioustwofiscalyears GrossprimarydeficitatRs.30,473crore(0.4percent
ofGDP)duringApril-September 20I0wasmuchlowerthanthecorresponding periodofprevious
yearatRs;I,II,I06crore(1.8percentofGOP).It constituted23.0percentofthebudgetestimates
I
for2010-11.
B. RevenuePosition:Reflectingthecombinedimpactofeconomicrecoveryandpartialroll-backof
indirecttaxratecuts,aperceptibleincreaseof62.9percentwasobservedinrevenuereceiptsduring
April-September20I0asagainstadeclineof0.2percentinApril-September2009.Theincreasewas
due tomarked improvement inthecollection oftaxand non-taxrevenue.As percent of budget
estimates,revenuereceiptsat58.4per cent,weremuchhigherthanthefirsthalfofthepreviousyear (39.8percent).
TaxRevenue:Taxbuoyancyseemstohaveimprovedwithfirmingofgrowthmomentumin20I0-11.
Growth in majorcategories oftax receipts is much higherduring thefirst halfthan the growth
budgetedtorthefullyear.GrosstaxrevenueduringApril-
September2010increasedby25.3percenlto·3.24,397crore,incontrasttoadedineof7.6percentduringApril-
September2009.Thislargely reflectedthehightaxbuoyancy,asexpectedinbudget20I0-
11,duetoreversaloftaxratecutsand recoveryineconomic
growth.TaxesassignedtoStates/UTsincreasedby24.5percentas{lgainsta
declineof6.0percentin thecorrespondingperiodofpreviousyear.ThenettaxrevenuetotheCentre
(adjusted of taxes assigned to States/UTs and surcharge for financing the National Calamity
Contingency Fund)increasedby25.7percem,whileithaddeclinedby8.2percentduringthefirst
halfofpreviousyear.Economicrecoveryandbettercorporateperformanceduring thefirsthalfof
201 0-1I ledtoincreaseinthecollectionofincometaxandcorporatetaxascomparedvviththefirst halfof2009-
l0.ItmaybenotedthattheUnionBudget20I0-11proposedtorestorethebasicdutyon
crudepetroleum,dieselandpetrolandotherrefineryproducts.Inaddition,thecentralexcisedutyon

4. petrolanddieselwasproposedtobeincreased.Therefore,policyofreversalofratecutscombined
with'higherindustrialgrowthseemstohaveledtoincreaseincollectionintheUnionexcisedutiesby
41.1 percentasagainstadeclineof22.9percentinthefirsthalfofpreviousyear.Similarly,risein
customsdutycollectionscanbeattributedtoasteepriseinimportsinthefirsthalfof2010-11.
Non-TaxRevenue:Non-taxrevenue,increasedby180.3percenttoRs.I,64,819crore,duringApril-
September20I0,significantlyhigherthanthegrowthof37.9percentinthecorrespondingperiodof
thepreviousyear.Theimprovementinnon-tax-revenuecollectionsvasonaccountofthemore-than
budgetedmobilisationofrevenuesfrom3Gspectrumandbroadbandwirelessaccess(BWA)auctions. C Non-
DebtCapitalReceipts:Non-debtcapital receiptscomprising recoveryof loansand other
receiptsatRs.6,491crorewerelowerthanthatinthepreviousyear,despitethebudgetestimatesfor
20I0-II beinghigherthanthatof2009-10.Aspercentofbudget estimates,non-debtcapitalreceipts
were14.4percentinApri!-September20I 0,muchlowerthan21.9percentduringthecon·esponding
periodofthepreviousyear.Inthisregard,itmaybenotedthattheCentralGovernment:hasalready
initiatedtheprocessfordisinvestmentofselectcentralPSUs.
D.Expenditure Pattern:Aggregateexpenditureduringthefirsthalfof2010-11 registeredalower
growthascompared withthefirsthalfof2009-10Thelowergrowthcanbeattributedtodeclinein
non-planexpenditureinSeptember20I0.Inspiteofhighergrowth ininterestpaymentsinApril-
September2010,growth inrevenueaccountofnon-planexpenditurewaslowerthanthatinApril-
September2009whileasignificantincreaseincapitalaccountofnon-pial).expenditurewasobserved
duringApril-September2010.
PlanExpenditure:PlanexpenditureatRs.1,69,707crore.however,increasedatahigherrateof33.9
percentthanthatof16.9percentinthefirsthalfof2009-10.Aspercentofbudget estimates,at45.5
percent,itwashigherthan39.0percentinthepreviousyear.Thiswas mainlyduetoincreasein" expenditure
undervarious Ministries/Departments likeruraldevelopment, agriculture, healthand
familywelfareanddrinkingwatersupplydudngtheperiodApril-September20]0ascomparedwith
thecorresponding periodofpreviousyearWithintotalplanexpenditure,boththerevenueandcapital
componentsrecordedhighergrowthduringthefirsthalfof20I 0-1I constituting46percentand42.9
percentofBEasagainst38.9 percentand39.8percentinthecoJTespondingperiodoftheprevious
year.Theincreaseinplanrevenueexpenditurewasprimarilyonaccountofincreaseinexpenditureon·
socialservices,othereconomicservicesandgrantstoStates.Capitalcomponentofplanexpenditure increased
mainlybecauseof increaseinloansandadvancesandexpenditureonaccountofsocial services
Non-PlanExpenditure: Non-planexpenditureat Rs.3,68,270croreduring April-September 2010 registered
a substantially lowergrowth of 14.3percent ascompared with33.8 percent inthe
correspondingperiodofpreviousyearAspercentofbudgetestimates,itformed50.1percent,higher
than46.3.percentinthepreviousyear.Thehighergrowthinnon-planexpenditurewasobserved
incapitalaccountwhilethereve11uecomponentshowedalowergrowth.Interestpaymenthasbeena major item
under non-planrevenueexpenditure during all months of the first half of 2010-11). Interest payments
increased steeply by 18.6 per cent during April- September 20I0 over the corresponding period of
previous year. A modest decline inthe Central Government's non-plan
expenditureonmajorsubsidiesduringApril-
September20I0canbeattributedtoadeclineinfertilisersubsidy.Inthiscontext,itmaybementionedthattheCentral
Governmenthastakensomeinitiativeto
reformsubsidybyannouncinganutrientbasedsubsidyforthefertilisersectorwhichwassupposedto
reduceimbalancesintheuseoffertilisersinadditiontocontainingthesubsidybill.Thecombined share of interest
paymentsand subsidies innon-plan revenueexpenditure stood at50.8 percent
(almostthesamelevelduringthecorrespondingperiodofthepreviousyear).Capitaloutlayduringthe
firsthalfof20I0-I Iincreasedby30.1percenttoRs. 44,653crore,asagainsttheincrea8eof65.8per
centinthefirsthalfofthepreviousyear.Thisismainlybecauseoflowergrowthindefencecapital
outlayduringfirsthalfof2010-1I,whichincreasedby24.1percentcomparedwitha·nincreaseof
I 11.8percentinthe correspondingperiodofpreviousyear.Growthinnondefencecapitaloutlaywas
marginallyhigherinthefirsthalfof2010-11ascomparedwiththefirsthalfofpreviousyear.
E.FimmcingtifGrossFiscalDeficit:Thefront-loading of marketbon·owingprogrammeof the
CentralGovernmentforthefirsthalfof20I0-1I meantthatthemarketborrowingsfarexceededgross
fiscaldeficit.Marketborrowingsconstituted153.4percentoftheGFD.Therewerealsonetinflowof
resourcesonilCContofstaWprovidentfunds, natiqnalspl<JllSqvingfundandextemalassistanceto

5. financetheGFD.Ontheotherhand,thecontributionfromtreasurybillswasnegative.Yet,duetothe
surplusmarketborrowings,therewassubstantialaccumulationoffundsintheinvestmentofsurplus cash
accountand thecash balancesaccount togetheramountingto26.7percentofGFD.Gross
marketborrowingsthisyearasonNovember19.2010stoodatRs.3,75.481crore(75.3percentof
BE)asagainstRs.3,96,369crore(80.7percentofBE)duringthecorrespondingperiodofprevious
year.ThecorrespondingnetmarketborrowingswereRs.2,65,925crore(77.I percentofBE)andRs.
3,35,376crore(84.3 percent of BE). During2010-11 (uptoNovember 22,2010), the Central
Governmenttookrecoursetowaysandmeansadvances(WMA)for57daysascomparedwith76
daysduringthecorrespondingperiodof2009-I0.Commencingtheyearwithasurpluscashbalance
ofRs.18,282crore(end-March20I0),theCentralGovernment utilisedthesebalancestomeetits
expenditureneedsandresortedtoWMAbetween April6,2010andMay30,2010andonSeptember
4and5,20I0.During 20I0-11,theGovernmentresortedtooverdraftonsixdays(twospellsofatotal
ofthreedayseachinAprilandMay20I0)ascomparedto44daysduringthecorrespondingperiodof the
previousyear.ThedailyaverageutilisationofoverdrafttillNovember22,2010stoodatRs.
I06.85croreascomparedto'I,284.34croreinthecorrespondingperiodoftheptecedingyear.With
theinflowofindirecttaxesandsurplustransferredfromtheReserveBank,thecashbalancesturned
intosurplusbetweenMay3I,20I0andSeptember3,2010andfromSeptember6,20I0tilldate.The
averagedailyutilisationofWMAbytheCentralGovernment(uptoNovember22,2010)wasRs.
3,756croreascomparedwithRs.5,328croreinthecorrespondingperiodoftheprecedingyear.
Withcontinued economicrecoveryand reversalof tax ratecuts,taxcollections havedisplayed
buoyancyduringthefirsthalfof20I0-11.Inaddition,themobilisationofrevenuesfrom3Gspectrum and
broadband wirelessaccess (BWA) auctionshashelpedto easethe pressure on Government financesthus
far(i.e., uptoSeptember2010).However, theimpactofone-offnatureof
revenuelmighttaperoffinthemonthstocomewithapick-upinexpenditureandmoderationinthelevelsof
growth in revenues. Durable fiscalconsolidation would require correction on the recurring
componentsofexpenditureandreceipts,andlessrelianceonone:.offitems.Inthecomingmonthsof
theyear,developmentswithregardtotheprogressindisinvestment,thelikelyimpactofeconomic
growthontaxrevenuesandcashoutgoonaccountofsupplementarydemandforgrantsmayhave
implicationsforoverallCentralGovernmentfinances.
QUESTIONS
l.Howdoyouthink thegovernmenthaspresentlycontainedits fiscaldeficit?
2.Doyouthinkdisinvestmentwouldhelpthe governmentcontainfiscaldeficitfurther?
3.Whydoyouthinktheeconomyisstillreelingunderthepressureofhighinflationrate?
4.Whichreformprocessis likelytoinfluencegovernmentrevenuesandexpendituresmost?
5.Whyisathereadeficitinthegovernmentstatementdespite8.9%GOPgrowthinlasl:Halfyearly evaluation?

6. IndiaanditspathtoRecoveryin2010
The global economy, which recovered fasterthan expected in thefirst quarter of 2010,
slippedagainintoastateofuncertaintycausedbyconcernsrelatingtofiscalsustainabilityin
theEurozoneandotheradvancedeconomies.Advancedeconomieswillneedtoresolvethe
tensionbetweencontinuingthefiscalstimulustosustaintherecoveryandreturningtofiscal
consolidationtopreservemedium-termgrowthprospects.Thevolatilityinglobalmarketsso
farhasaffectedIndianstockmarkets,andtheglobalneartetmoutlookfortradeandcapital flows
isuncertain.Whilethestrengthofdomesticgrowthimpliesthatimportgrowthwill
exceedexportgrowth,persistenceofriskaversionamongglobalinvestorsduetoun_cef!:ainglobalenvironmentc
ouldmakecapitalinflowsmorevolatile.Themulti-speedgrowthpattern
acrossadvancedandemergingeconomiesandtheir divergentinflationpathswouldwiden
furthertheasymmetryinmonetaryexit,allofwhich.couldpotentiallyaddvolatilitytoglobal
commodityandassetpricesaswellasexchangerates. Theuncertainglobalenvironment
warrantsadoptionofcautionintheformulationofpoliciesduring2010-11.
TheoutlookforIndia'sGDPgrowthin2010-11hasimprovedsignificantly,giventhebroad-
based,robustrecoveryseeninthelastquarterof2009-10.Theprospectsofcontinuationof
themomentumarcgood,driven bybuoyantperformanceoftheindustrialsector,abetter
performanceofthemonsoonrelativetolastyear,andsustainedresilienceofservices.From
thedemandside,investmentdemandhadalreadywitnessedasharpaccelerationbythe fomth" quarterof2009-
10andtrendsinthegrowthofproductionofcapitalgoodsinthefirstquarter
ofthisyearsuggestcontinuationofthemomentum.Privateconsumptiondemand,goingby therecent
patternincorporatesales,theproduction·ofconsumerdurables andautosales suggestagradualpick-
up,whichcouldaccelerate tomakethegrowthprocessmoreself- sustaining. Although concernsabout a
possible weakening of global recovery persist,
domesticriskstogrowthhaverecededsignificantly.Asaresult,theReserveBankrevised
upwardsitsGDPgrowthprojectionfor2010-11to8.5percentin July2010,from8percent
withanupwardbiasinApril2010.
Supply bottlenecks, whetherintheformofinabilityofproductiontorespondtogrowing demand or in the form
of inadequacy of the supply chain, have exerted significant
f?" inflationary pressuresinrecentyears,impeding theprogressoninclusivegrowth through asymmen·icimpact
on different sections of the society. Inthe firstquarter of 2010-11, headline int1ation remained in
double digits. Continuation of the monetary policy
normalisationprocessthatstartedinOctober2009ledtocumulativeincreaseinthereporate by
100basispoints,thereversereporateby125basispointsandCRRby100basispoints,
effectedovertheperiodFebruary2010toJuly2010.Theeffectivepolicyratehas,ofcourse, beenraised by250
basispointsin viewofthereporateemerging astheoperating rate.
Takingintoaccountthedoubledigitinflationinthefirstquarterof2010-11,aswellasthe expected beneficial
effect ofarelatively bettermonsoononfoodinflation, thebase line projections available
aboutglobalcommodity prices, and thelagged impactof monetary
policymeasures,theReserveBankreviseditsinflationprojectionto6.0percentforMarch
2011inJuly2010fromtheearlierprojectionof5.5percentmadeinApril2010.
Followingthe globalfinancialcrisis,the domesticmacroeconomicenvironmentchanged significantly
overfour distinct half-yearly phasesstartingfrom thesecond halfof2008-
09.ThereareseveralchallengesfacedbythegovernmentandRBLAs perRBI,it assessesthe following
challenges.First, GDPgrowth decelerated in the second half of 2008-09,

7. rangeofconventionalandunconventiona)measw-estoJimittbeimpactoftheadverseglobal
developmentsonthedomesticfinancialsystemandtheeconomy.Second,inthe firstI1alfof
2009-10,weaknessintheeconomicactivitynecessitatedcontinuationofthemonetarypolicy
stimulus.Thelowinflationenvironmentalsocreatedthe spaceforcontinuationofan
accommodativemonetarypolicystance.But,bythemiddleoftheyear,adeficientSouth-
Westmonsoontriggeredrenewedconcernsfor recoveryaswellasfood inflation.ThiTd,
despitethedampeningpulls ofthedeficientmonsoonandanadverseglobaleconomic
environment,growthinGOPexhibitedarobustrecoveryaheadoftheglobaleconomyinthe
secondhalfof2009-10.Foodinflation,thathadstartedrisinginresponse totheweak
kharifproduction,turnedouttobe morepersistentinthesecondhalfoftheyear.Risingand
increasinglygeneralisedinflationwarrantedwithdrawalofthepolicystimulus. Sincethe policy
challenge for the Reserve Bank was to anchor inflationary expectations without
harmingtherecovery,acalibratedapproachtomonetaryunwindingwasadopted.Fourth,in thefirstfew
monthsof2010-11,itbecameincreasinglyevident thatgrovvthmomentum
wouldfmiherconsolidatean1idstpersistentsignsofweaknessintheglobaleconomy,taking the
mmualgrOvthcloser to the pre-global crisis trajectory. But theheadline inflation
remainedatorclosetodoubledigitsoverfoursuccessivemonthsoftheyearandtheinflation
processhadalsobecomemoregeneralised.Thebalanceofpolicyattention,thus,hadtoshift
fromrecoverytoinflation.
TheUnionBudgettor2010-11,recognisingtheimpmianceoffiscalconsolidationtoimprove '
theoverallmacro-economicenvironment,announcedplansforexit,bothduringtheyearand
overthemedium-term.ThehighgrovvthphaseofIndiaduring2003-08benefitedfromas
wellasfacilitatedtheprogressonfiscalconsolidation.Theemphasisinthecurrentphaseof
consolidation,however,shouldbeonthequalityofadjustment,whilealsobuildingadequate fiscalspace
todeal withfutureadverseshocks togrowthandinflation.Thestrategyof consolidation in the medium-
term cannot place undue importance on one-off gains in
revenue,astheywillnotbeavailableinthefuture.Thereceiptsfrom3G/BWAspectrum auctions turned
out to be Rs.l,06.262 crore, more than three times of the budgeted
expectationsofRs.35,000crore.Theseadditionalresources,however,wouldbeusedtofund
additionalexpenditureasreflectedinthefirstbatchofSupplementaryDemandsforGrants for2010-
11.Thus,suchone-offgainsarenotavailabletocontainfiscaldeficit.Itwouldbe
. desirabletoadoptaholisticapproachinvolving measurestoaugmentrevenuecollectionona
sustainablebasisandrationalisationofrecutTingexpenditure,withafocusoncurtailingnon-
planrevenueexpenditure.Inthisregard,subsidyreforms,suchasthepricingofpetroleum
productslinkedtointernationalpricesareimpottanttoeliminatethescopeforaccumulated
underrecoveries,whichhavebeenamajorpotentialsourceofstressonthefiscalsituation.
TheproposedimplementationoftheDirectTaxCode(DTC)andGoodsandServicesTa.'<.
(GST)byApril2011willalsoensuremuchneededrefonnsreflectingthe changingstructure
oftheeconomyandincreasingintegrationoftheeconomywiththerestoftheworld.
Volatilecapitalmovementshaveinfluencedthedomesticstockpricemovements,exchange rate
anddomestic liquidityconditionssignificantly in the past. In 2009-10, the current
accountdeficitwidenedto2.9percentofGDP.Volatilecapitalflowshavebeenapotential
sourceofinstabilityforemergingmarketeconomies.Costscouldmagnifyforaneconomy
during periodsof bothtoolittleandtoomuchofcapitalflows,unlesstheyaremanaged
judiciously.India,inrecentyears,hadtomanagephasescharacterisedbylargenetinflowsas
wellassuddenoutflowsinthemidst ofaglobalcrisis.Ajudiciousmixofflexibleexchange rate,
sterilisationof the impact of int1owson domestic liquidity, cautious approach to
liberalisationofthecapitalaccount,andthecushionofforeignexchangereserveshas

8. beenusedtodealwiththeadverseramificationsofcapitalflows.
Questions
1. HowfardoyourbelievethatIndianeconomyexhibited broadbasedrecoveryinthe
second halfof2009-10 fromthe slowdow11that hadstarted inthesecond halfof
2008-09?
2. DoyoubelieveaccommodativemonetarypolicystanceoftheReserveBank,besides
ensmingnon-disruptivefinancingofthefiscalplans,createdanoverallliquidityand
interestrateconditionthatwasconduciveforgrowth?
3. DoyouthinkstablefinancialsystemofIndiacontinuedtohaveafavourablimpact
ontheoverallbusinessconfidence,whilealsoensuringavailabilityofresourcesffombanks,non-
banksandmarketstomeetthefinancingneedsoftherecovery?
4. Isthereapolicydilemmaofcontaininginflationwhilesupportinggrowthwarranted
reprimitisationofthepolicygoals?

9. -
Theperformanceofabankin2008-09shouldbeviewedinthebackdropoftheglobal
financialcrisisthathaditsbeginningsinUSsubprime sectorandbroaderfinancialmarkets
butspreathroughouttheworld,tumingintoafullblownglobaleconomiccrisis.Unlike
developeconomies,theslowdowninIndiahasnotbeenledbythefinancialsectorbut
affectedmainlythefollowing:
a)Thesharpslowdovvninglobalimportdemandresultedin anexportslowdown
b)Acontractionintheavailabilityofglobalfinance,particularlyexportfinance,andan
increaseinthecostofforeigncurrencyfunds
c) Slowdownininvestmentplansofmanycoporatesinanticipationofa demandslowdown.
Overthelastfewyears,Indiahasbecomeincreasinglyintegratedwiththeglobaleconomy,
boththroughtradeandthroughexposuretofinancialmarkets.The lossofexportmarketshas
consequentlyhitdomesticdemandquitehard,particularlyasmanyexportsegmentsarealso
employmentintensive.Thedemandslowdownhasleadtoinventorybuildups,constricted
cashflowsandcutbackincoporatecapexplans.Thecashsqueezehasledtoconcernsabout potential
defaultsonbankloans.Theconsequentriskaversionandtighteningofcredit
standardsinbanklendinghasalsoreducedconsumerdurablesfinancing,addingweakrapid
andsustaineddecelerationofgro-wth.AlthoughtheIndianeconomyhasdonerelativelybetter
in2008-09comparedtoothercountriesintheemergingmarketspeergroup,theslowdownin,
fiscal2009wasdeeperthananticipated.Accordingly,theestimatesofGDPgrowthhave
beenloweredtobetween6.5%and7.00%infiscal2009,lowerthantheaveragegrowthrate
of8.5%ofthepreviousfouryears.
TheFiscalStimulusInIndia
Bothgovernmentandthe RBIhavetakenfiscalandmonetarymeasureto addressthis
slowdown.Thecenterandstategovernmentsarespendinganadditional3%to4% ofGDPon
variousstimulusmeasures,taxcutsandspendingprogrammes.Inaddition,thereareother
spendingprogrammes(suchastheSixthPayCommissionpayouts)thatarealsolikelyto
haveapositiveeffectondemandexpansion.Thefiscalpushhasbeencomplementedbya
fairlyactivemonetarypolicy.The RBIhasreducedits policyrates(LAF RepoRates)by400
basispoints sinceSeptember2008 and injected significant liquidity into the markets. However
the key benchmarkrate of the 10 year government securities did not fall
correspondingly,primarilyduetotheenlargementinthegovernmentborrowingprogramme.
TheWholesalePriceIndex(WPI)inflationdroppedcloseto0%bytheendofFY2009.
Globally,pricesarelikelytoremainsubduedduetoweakconsumptionandinvestment·
demand.InIndia,howeverthecostoflivingrepresentbyConsumerPriceIndex(CPJ)is
likelytocontinuetoremainmuchhigherduetohigherweightageforfoodandhousingcost
intheconsumption basket.
Outlookfor2009-10
Whiletheeconomicconditionofmajordevelopedeconomiesisunlikelytoimproyeip2009,
·furtherdeteriorationisnotexpectedandthegeneralviewisthattheworstisover.The
residualeffectsonjoblossessandcreditdelinquencies,howeverwillkeepdemandconditions
weak,despitethesignificantstimuluspackagesofferedbybothgovernmentsandcentral
banks.Intheshortterm,exportdrivenactivityislikelytoremaindepressedandcapital expenditure
islikelytoremainmuted.Increasedsalesincertainsectorslikecementandsteel,
andpricediscotmtsresultingincertainconsumerdurablessegmentsarealreadyvisible.The
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stimulus packageofthegovernmentandtheimplementation oftheSixthPayCommission, which will
increase the pmchasingpower of public sector employees, should also boost
demand.Thefiscalsituationisexpectedtoremainweak;,however, andincreasegovernment
expenditurecommitmentsmaynotbematchedbybuoyancyintaxrevenues.
Despite theweak demand conditions, inflationary pressures are expected to build up
graduallygiventhe infusionofliquidityandthehighersupportpricesformanyfoodand
conm1ercialcropsthatwillkeeppricesofprimaryproductfirms.Thepotential inflationary pressure is
likely to dissuadeRBI from aggressively reducing short term policy rates. However,demand
fornon-foodcreditremaining weak,wedonotexpectamoderatecutin RBIpolicy.
Thecombination ofburdenedfiscaldeficit,somewhateasymonetarypolicyandcomfortable
liquidityisexpected topulldowntheshort termyieldcurve.Interestratesinmedium
andlongermaturitiescouldremainrelativelyhigh,particularlyintheinitialmonthsofthecurrent
fiscalyear.Onthewhole,thecostoffundsforbanks(andhenceforcorporates)isexpected
todeclinethroughtheyear.
Despitedifficultyfundingandcreditenvironment, theextensionofcreditbybanksinIndia has been
reasonably satisfactory and accelerating its delivery will be a key factor in;;· sustaining thepositive
effects ofthefiscalandmonetary stimulus measures. Inparticular,
bankcreditwillplayalargeroleasotheravenuesforraisingfundsarelikelytoremaintight.
Whileconcemsaboutcreditqualityhaveimpededalargerincreaseinnon-performing asset without
deleterious capital erosion. Given the fact that costs of funds for banks steadily diminishing
andwilltranslateintolowerlending rates,thedemand forbankcredit should pick up incourse of
time.However, foreigncurrency funds areexpected to still remain relativelyscarce.
Weexpectthegeneralriskperceptionlevels,whicharestillfairlyhigh,togradually decline over 2009-10
resulting inincreased capital flows tosectors with growth opportunities. A
goodRabiharvestwillalsodrivegrowthinagrorelatedindustriesandancillaryservices.
Questions:
1.Whatmacroeconomic factorsdoyouthinkthebankhasusedtounderstand theeconomy
andrelateitsperformance?
2. Towhichsectormodeldoesabankbelongandtowhich sectorsdofiscalandmonetary
stimulusbelong?
3.Whyaresectorsotherthanbankingimportantfortheperformanceofabank?
4.Howdoesstockpilingandliquidityinfluencethegrowthprospectsofaneconomy?
5.Whydoesthebankexpectthegeneralperceptionlevelstobehigh?
6.HowisIndiainfluencedbytheglobaleconomy,explainwiththecircularflowmodels?
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