On the basis of unexpectedly strong national-accounts data for July-September, we have revised up our forecast for growth in real GDP (on an expenditure basis) to 9.1% (from 8.8% previously) in 2010/11 and to 8.9% (8.6% previously) in 2011/12. Real GDP growth is then forecast to average 8.7% a year in the period from 2012/13 to 2015/16. India's strong growth fundamentals-high saving and investment rates, fast labour force growth and the rapid expansion of the middle class-will ensure a steady performance, with little volatility in growth rates from year to year. But despite India's current impressive growth performance, there are a number of clouds hanging over the economy, including the stubbornly high inflation rate and the wide (albeit narrowing) budget deficit. It is for these reasons that we do not expect the government's GDP growth target (on a factor-cost basis) of 10% in 2011/12 to be achieved. Growth will continue to be constrained by infrastructure bottlenecks, shortages of skilled labour and the difficulties involved in shifting resources from low-productivity agriculture to higher-productivity manufacturing. However, India has huge scope for catch-up growth, not only with developed countries but also with other emerging markets.

Economic growth will be led by private investment and government spending in the next five years. Private consumption will not grow as fast as the overall economy, and net exports are forecast to exert a slight drag on GDP growth as imports are sucked in to satisfy rapidly growing domestic demand. Growth will continue to be led by services and industry, while the agricultural sector and its reliance on monsoon rains poses a downside risk to the rate of economic expansion. The possibility of a reversal of capital inflows, which have been financing India's persistent current-account deficit, also represents a downside risk-one that has risen in prominence since the EU sovereign debt crisis deepened in mid-November. Another downside risk to our forecast for buoyant economic growth is any further increase in commodities prices, which would cause the current-account deficit to widen.

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