real economy 7. under the impact of external demand shocks, the indian economy witnessed moderation in growth in the second half of 2008 – 09 in comparison with the robust growth performance in the preceding five years ( 8. 8 per cent per annum ). the deceleration in growth was particularly noticeable in negative growth in industrial output in q4 of 2008 – 09 ; a decline for the first time since the mid - 1990s ( table 1 ). this was on account of erosion of external demand which affected industrial performance ; a reflection of increasing globalisation of the indian industry. 8. the transmission of external demand shocks was swift and severe on export growth, which declined from a peak of about 40 per cent in q2 of 2008 – 09 to ( – ) 15 per cent in q3 and further to ( – ) 22 per cent in q4 ; a contraction for the first time since 2001 – 02. concurrently, domestic aggregate demand also moderated resulting from sharp deceleration in the growth of private consumption demand. in order to respond to the slowing demand, fiscal stimulus measures were undertaken by the government which included both tax cuts and increase in expenditure. this raised the fiscal deficit of the central government by 3. 5 per cent of gdp in 2008 – 09. consequently, the growth in government final consumption expenditure registered a sharp increase in q3 and q4 of 2008 – 09 ( table 2 ). it is, however, important to note that unlike many countries the entire fiscal stimulus in india was aimed at addressing the deficiency in aggregate demand rather than extending support to the financial sector. while this meant a deviation from the planned fiscal consolidation path as committed under the fiscal responsibility and budget management ( frbm ) act, without the stimulus the deceleration in gdp growth during 2008 – 09 would have been much sharper. table 1 : key macroeconomic indicators – india indicators 2008 – 09 : q1 – q4 2009 – 10 : q1 – q2 real gdp growth ( y - o - y ) ( % ) industry services q1 7. 8 5. 1 10. 0 q2 7. 7 4. 8 9. 8 q3 5. 8 1. 6 9. 5 q4 5. 8 – 0. 5 8. 4 q1 6. 1 4. 2 7. 7 q2 – – – inflation ( y - o - y ) ( % ) wpi cpi - industrial workers 12. 0 7. 7 12. 1 9. 8 5. 9 9

outlook for india going forward is mixed. there is evidence of economic activity slowing down. real gdp growth has moderated in the first half of 2008 / 09. the services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub - sectors. for the first time in seven years, exports have declined in absolute terms for three months in a row during october - december 2008. recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system. higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence. the index of industrial production has shown negative growth for two recent months and investment demand is decelerating. all these factors suggest that growth moderation may be steeper and more extended than earlier projected. in addressing the fall out of the crisis, india has several advantages. some of these are recent developments. most notably, headline inflation, as measured by the wholesale price index, has fallen sharply, and recent trends suggest a faster - than - expected reduction in inflation. clearly, falling commodity prices have been the key drivers behind the disinflation ; however, some contribution has also come from slowing domestic demand. the decline in inflation should support consumption demand and reduce input costs for corporates. furthermore, the decline in global crude prices and naphtha prices will reduce the size of subsidies to oil and fertilizer companies, opening up fiscal space for infrastructure spending. from the external sector perspective, it is projected that imports will shrink more than exports keeping the current account deficit modest. there are also several structural factors that have come to india's aid. first, notwithstanding the severity and multiplicity of the adverse shocks, india's financial markets have shown admirable resilience. this is in large part because india's banking system remains sound, healthy, well capitalized and prudently regulated. second, our comfortable reserve position provides confidence to overseas investors. third, since a large majority of indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that is plaguing the advanced economies should be quite muted. consequently, consumption demand should hold up well. fourth, because of india's mandated priority sector lending, institutional credit for agriculture will be unaffected by the credit squeeze. the farm loan waiver package implemented by the government should further insulate the