annual report 2009-10 - IRDA

ANNUAL REPORT 2009-10OVERVIEWThe Indian Economy:1. The Indian economy registered an impressivegrowth rate of 7.4 per cent in 2009-10 following 6.7per cent in 2008-09. This was achieved against thebackdrop of a broad based recovery in the secondhalf of the financial year. The overall stability of thefinancial system of India continued to positively impactbusiness confidence. The major source of worry,however, was the inflationary conditions whichchanged significantly in 2009-10, particularly, in thesecond half of the year. It surged to 11 per centtowards the end of 2009-10, aggravated by the initialspurt in prices of food items. Positive developmentwas, however, observed in demand for privateinvestment during the last quarter of 2009-10 and hasbeen particularly robust in the first quarter of 2010-11. Although there has been some concern aroundthe crisis emanating from the sovereign debt in theEuro area and its likely impact about the durability ofthe global recovery, the overall movement in growthhas been positive.2. The real GDP growth turned around at 7.4 per centin 2009-10, up from 6.7 per cent in 2008-09. Althoughstill below the pre-global crisis growth phase of 8.9per cent during 2003-08, the possibilities of it growingfurther are clearly reflected. The contribution to thegrowth came from a strong recovery in industrial sectorand the services sector thereby reducing the impactof a scarce South-West monsoon. The contributionof the industrial sector to the overall growth increasedsharply at 28 per cent in 2009-10 (9.5 per cent in2008-09), while the growth in the services sector waslower at 8.3 per cent in 2009-10 (9.3 per cent in2008-09). Despite the impact of the deficient monsoon,agriculture and allied activities contributed about 14.6per cent to the GDP. The performance of the sectorhas a significant impact on price stability.3. The macro-financial developments during2009-10 have established the resilience of theeconomy and its ability to recover faster from aslowdown. The economy has also emerged strongerin terms of the ability of the slowdown in agriculturalproduction impacting the growth of industry andservices sectors, even though the importance of theformer cannot be overstated since it impactsinflationary trends and is the main stay for livelihoodof the rural population.4. The financial markets during 2009-10 showed signsof volatility while reflecting the developments in theglobal markets. However, the signs were clearly thatof rising activity. This is critical to ensure that theeconomy is catapulted to the next phase of growth.The external balance situation improved and reflecteda positive growth in both exports and capital inflowsduring 2009-10. This reflected a favorable trend fromthe downturn observed in the wake of the financialcrisis. Overall, developments during 2009-10 havebeen positive although there had been some macroeconomicconcerns at the beginning of the year.Global Economic Environment:5. As per the Report published by the InternationalMonetary Fund, the global financial system is still in aperiod of significant uncertainty. The setback hasoccurred in the second quarter of the current calendar2010 due to the turmoil in sovereign debt markets inEurope once again bringing to the fore thevulnerabilities of bank and sovereign balance sheetsagainst the back drop of the financial crisis. TheEuropean economies have once again been in theeye of the storm, having been a witness to thesovereign debt sustainability challenges, resulting infunding pressures. With the spillover effect onto thebanking sector, the resultant impact was in terms ofshrinking credit. Although, the regulatory and policylevel responses at the international levels brought thesituation under control in terms of stabilising fundingmarkets and mitigating risks, the conditions remainweak. Economies still need to find answers to thechallenges posed by a slower than expected level ofrecovery, higher debt levels and rollovers, and a stillimpairedfinancial sector.6. The global output has expanded in tune with theprojection with the economic environment improvinggradually. This has been supported by growth in theemerging market countries which has been particularlystrong. It has also been observed that economies aremoving from temporary support provided to them tomore self-sustaining private demand. However,concerns remain in terms of dealing with legacyproblems in the banking sector, particularly thoserelating to recapitalisation; strengthening thesovereign balance sheets; and strengtheningregulatory reform to move towards building resilience1