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The Indian economy continued to exhibit robust growth even though global economy experienced many uncertainties. The real GDP growth emanating from the industry and services sector declined slightly during 2007-08. However, improvement in the performance of the agriculture sector in India not only contained inflationary pressures on some agricultural commodities but also supported the growth momentum in the economy. The continued acceleration in saving and investment rates and sustained productive growth were the underpinnings of the growth momentum in the Indian economy during 2007- 08. The real GDP growth in 2007-08 though high at 9 per cent was lower than the 9.6 per cent recorded in 2006-07. Services sector continued to grow at double digit level. The deceleration in the industry sector was also reflected in the Index of Industrial Production. The growth in the Index of Industrial Production during 2007-08 was 8.5 per cent (as against 11.5 per cent observed in 2006-07).

Gross domestic savings as per cent of GDP at current market prices increased from 34.3 per cent in 2005-06 to 34.8 per cent in 2006-07 contributed mainly by increase in the savings of private corporate sector and the public sector. The gross domestic capital formation rate at the economy level increased from 35.5 per cent in 2005-06 to 35.9 per cent in 2006-07. The saving preference of the households had slightly shifted away from the bank deposits in 2007-08 from that of 2006-07. According to the preliminary estimates released by RBI on household financial savings for 2007-08, insurance funds constituted 17.5 per cent of the total gross financial savings of the households in 2007-08. This has resulted in an increase in the share of insurance funds in the total household savings. A similar increase was observed in mutual funds also. The above shift in the preferences towards insurance sector was mainly on account of the households preferring to invest in Unit Linked Insurance Products (ULIPs) of life insurers in the back ground of bullish stock market as the returns of a part of ULIPs depend on the behaviour of the stock market. A similar observation can be made about the investments in mutual funds. It may be noted that during 2007-08, the BSE Sensex has shown abnormally high levels and the gains were across

all sectors of the index. The fiscal position of both central and states improved during 2007-08 even though there were higher outflows on account of high interest payments, subsidies and extra budgetary liabilities. Exports and imports accelerated during 2007-08 reflecting India’s diversified foreign trade. Capital inflows on a sustained basis were observed in 2007-08 and net surplus on invisibles in the Balance of Payments was buoyant offsetting a significant part of the merchandise deficit. The current account deficit as a per cent of GDP was 1.5 per cent in 2007-08 higher than 1.1 per cent observed in 2006-07.

Supply side pressures on key agricultural products, pass through of international crude oil prices, continued demand pressures have pushed the inflation rate as measured by movements in wholesale price index to a higher level of 7.7 per cent at end March 2008 as against 5.6 per cent recorded at end March 2007. However, on an average basis, it was lower at 4.7 per cent during 2007-08 than 5.4 per cent in 2006- 07. The growth in consumer price index for industrial workers was also high at 7.9 per cent in March 2008 as against 6.7 per cent a year ago. On an average basis, during 2007-08, it was 6.2 per cent as against 6.7 per cent in 2006-07.

During 2007-08 many policies regarding broadening and deepening of the financial markets, capital markets and bond markets were undertaken by the respective regulators. The Government on its part has helped in this process by allowing changes in the legal framework. The policies undertaken in the financial markets will help the insurance companies in managing their assets in a prudent and profitable way. Insurance companies are now allowed to access the negotiated dealing system – order matching using the constituents’ subsidiary general ledger route. This will help the insurance companies in participating in the negotiated dealing system for parking their excess funds. The SEBI has undertaken many initiatives in making the operations of mutual funds more transparent and investor friendly. The SEBI mandates FIIs to provide AAA rated foreign government securities as collaterals for margins against transactions in the derivatives segment.


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