Economic Outlook 2010 - Standard Chartered

[komal]

Economic outlook by Stanchart,

Domestic demand staged a comeback in Q2-FY10 after languishing for almost a year. We expect growth for FY10 as a whole (began 1 April 2009) to accelerate to 7.5%, from 6.8% in FY09, as all three components of domestic demand – private final consumption (55-59% of GDP), gross fixed capital formation (32-33%), and government consumption (9-10%) – rebound. The improving labour-market outlook, the positive wealth effect from improving asset markets, and improved credit flow to retail investors should all boost household demand. The structural inflexibility of government expenditure and the focus on higher infrastructure spending should also support robust GDP growth.

The return of domestic demand, firmer global commodity prices, and higher pricing power with producers could cause inflation from the manufacturing sector to inch higher in FY11. The opening up of India's capital account has taken a backseat since the global crisis. India’s total debt stock of USD 228bn (21.4% of GDP) as at June 2009 is comfortable, as the FX reserves ensure sufficient cover of 116.5%. The crisis has held important lessons for India.

On Policy

While the focus in FY10 was to maintain growth supportive policies, FY11 will present the more daunting task of facilitating the recovery without
stoking inflationary pressure. The government has limited scope for such policy adjustments due to the structural inflexibility of spending. The onus of managing the recovery process will primarily be on the Reserve Bank of India (RBI). The bank will need to strike the right balance between growth and inflation, actively manage liquidity against a backdrop of increased capital inflows, and ensure the smooth financing of huge government borrowing.