India: Contours of Macroeconomy

The short-run macroeconomic fluctuations are caused by shocks from aggregate demand and aggregate supply. A shock on aggregate demand moves output and prices in the same direction, while supply shocks move them in opposite direction. The global crisis posed negative demand shock via external and financial sector and a positive supply shock via decline in oil and commodity prices. As a result, real growth of Indian economy has declined to about 7 per cent after a sustained 9 per cent growth in recent four years. Along with declining output growth the inflationary pressures has eased. The contrast in growth and inflation in first and second half of 2008-09 is of significant visibility. In order to negate the demand shock, fiscal stimulus and monetary easing was necessary to restore the economy, at the cost of a short-term fiscal strain. The resilience of the economy is in high savings rate. The Gross Fixed Capital Formation had remained steady, despite the slowdown, suggesting investment momentum is maintained. The quarterly estimates of GDP show a 5.8 per cent growth in the last two quarters. This could be an early pointer that the worst of the crisis is behind us and the probability of situations worsening is limited.