Given this background what kind of growth can we expect in FY11? In our judgment, with the support from fiscal policy set to constant in the coming year, further economic expansion will hinge on continued growth in private final demand- both consumption and investment. Assuming a normal monsoon, we expect GDP growth to surge to 8.5% during FY12, driven by the robust industrial growth and resilient performance of the service sector. The focus of government spending on infrastructure sector would continue to support growth. The overall risks to the outlook however remain slanted to the downside. Risks to the outlook can stem mainly from poor monsoon and the possible need for further monetary tightening if inflationary pressures do not abate. There are also looming concerns over a second round of convulsion in the advanced economies. If this is to happen, the recovery process is bound to be impacted to a certain extent. We expect Consumption demand to be the major contributor to GDP growth in the coming fiscal, which in turn will augment investment demand. The impetus to consumption demand will come from healthy growth in income levels as job creation gathers pace. The broadening of the income tax slabs will leave more disposable income in hands of consumer and should boost spending. The other elements that would support the growth in industrial production include the prospect of a rebound in investment activity, increased thrust of the government on infrastructure projects and the renewed growth of exports. With the surge in industrial production, and favorable financing conditions, we expect capex plans to gain traction and investment rate to increase to 38-40% in FY12.

EQUITY MARKETS: Sensex however, did not cross its January 2008 high of 21,206 to end on a mediocre 12% return. That this was despite the net $ 28 billion pumped by FIIs into equities should possibly lead us to look deeper behind the euphoric coverage on market outlook. Indian markets were even ahead of China and Brazil. The MSCI Emerging Asia Index for India exceeded its normal 11% weight by about 50%. The Sensex is poised to end 2010 on a trailing PE of 23 and a 2011 PE of 20. It is at a hefty premium to the MSCI Emerging Market Index even when the Indian retail investor has not participated. We believe a market so precariously placed could trigger fickle FIIs outflows due to negative perceptions on the global and domestic front or even positive economic developments in the US. However, our strong faith in the India long term growth story firmly in place. Globally, the real threat is in the sovereign debt space, especially in the euro zone. There is the possibility of capital moving out of emerging markets to fund losses and support balance sheets.

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Economy outlook for 2011