Indian Economy: Outlook for 2009-10

Indian Economy : Forecast for 2009-10

• Relations with Pakistan are set to remain tense in the wake of Indian accusations of Pakistani complicity in the terrorist attack on Mumbai. The process of normalising bilateral ties will come to a temporary halt.
• The next general election, which must be held by May 2009, is certain to return another coalition government.
• The global financial crisis has triggered a complete reversal of monetary policy. After another 100-basis-point interest rate cut on December 6th, the Economist Intelligence Unit expects further rate reductions in 2009.
• Global deleveraging and moves to reduce risk exposure will hit India hard, and we now forecast real GDP growth of 5.6% in fiscal year 2008/09 (April-March) and 5.2% in 2009/10.
• The rupee will make up some of its recent losses against the US dollar during the forecast period, but will still record a year-on-year depreciation of 8.9% in 2009, averaging Rs47.8:US$1 in that year.

Monthly review

• On November 26th terrorists attacked Mumbai, India's financial and cultural capital. Over a period of three days heavily armed gunmen attacked ten sites, killing nearly 200 people and injuring hundreds more.
• In the wake of the attack, the home minister, Shivraj Patil, resigned. He was replaced by the former finance minister, P Chidambaram. The prime minister, Manmohan Singh, took over the finance portfolio.
• After alleging that"elements"based in Pakistan were responsible for the attack, India demanded that Pakistan extradite 20 militants that it accuses of carrying out terrorist attacks in India.
• The ruling Indian National Congress party fared better than expected in recent state assembly elections. It ousted the Bharatiya Janata Party in Rajasthan, retained power in Delhi and won the tiny state of Mizoram.
• On December 6th the Reserve Bank of India (the central bank) cut its two key short-term interest rates by 100 basis points each, taking its main lending rate, the repurchase (repo) rate, to 6.5%.
• On December 7th the government unveiled a fiscal stimulus package to shore up flagging domestic demand. It also cut central excise duty, and announced interest rate cuts on loans for infrastructure and exports.
• Real GDP growth stood at 7.6% year on year in July-September (the second quarter of 2008/09). The data did not capture a sharp deterioration in the global economic outlook in recent months, however.
• • The domestic political scene will be dominated in the early part of the forecast period by the next general election, which is due by May 2009. The increasing importance of regional parties will ensure that the next government will again be a coalition, likely to be led by either the current ruling party, the Indian National Congress, or by the main opposition Bharatiya Janata Party. An alliance of regional and left-wing parties is also a possibility.
  • Relations with Pakistan are set to remain under stress in the wake of the December 2008 terrorist attack on Mumbai. The process of normalising bilateral ties will come to a halt, and tensions may continue to escalate in the early part of the forecast period. However, the Economist Intelligence Unit does not expect the two countries to resume armed conflict.
  • A number of factors will conspire to keep the budget deficit in the range of 4-4.5% of GDP in fiscal year 2008/09 (April-March) and 2009/10, but it should then narrow gradually, to reach just over 3% of GDP by the end of the forecast period.
  • The global financial crisis has caused a major upheaval in India's policy priorities, as risks to economic growth now heavily outweigh inflationary threats. Monetary policy will be eased further in 2009. Real interest rates will remain negative this year, but should become positive in 2010-13 as monetary policy is adjusted to a more neutral setting.
  • Global deleveraging and moves to reduce risk exposure will hit India hard, and real GDP growth (on an expenditure basis) is estimated at 5.6% in 2008/09 and is forecast to slow to 5.2% in 2009/10, down from 9% in 2007/08. The economy should regain momentum in the remainder of the forecast period, with real GDP growth averaging 7.6% per year between 2010/11 and 2013/14. Information technology (IT) and IT-enabled services (ITES) output will continue to be among India's best-performing sectors, thanks to the country's cost advantages in these areas.
  • Although the merchandise trade account will record an expanding deficit from 2009, reflecting an increase in local demand for consumer goods, the deficit will be largely offset by the rising services surplus (driven by foreign earnings from IT and ITES) and continued inflows of remittances. Overall, the current-account deficit is forecast at the equivalent of 4% of GDP on average in 2009-13.

Key indicators	2008	2009	2010	2011	2012	2013
Real GDP growth (%)	5.6	5.2	6.5	7.8	8.1	7.9
Consumer price inflation (av; %)	8.1	6.1	4.7	5.1	5.2	5.2
Budget balance (% of GDP)	-4.3	-4.4	-4.0	-3.7	-3.4	-3.3
Current-account balance (% of GDP)	-4.2	-3.8	-4.5	-4.4	-3.9	-3.3
Lending rate (av; %)	12.8	11.5	11.5	11.0	11.5	11.5
Exchange rate Rs:US$ (av)	43.5	47.8	46.3	45.2	44.2	43.1
Exchange rate Rs:¥100 (av)	42.0	51.3	50.3	49.7	49.1	47.9