Most demand indicators continued to record strong rates of expansion in October-December 2010, and we still estimate growth in real GDP (on an expenditure basis) at 9.1% in 2010/11. We forecast GDP growth of 8.9% in 2011/12, following which growth will decelerate slightly, to average 8.6% a year between 2012/13 and 2015/16. India's strong growth fundamentals-high saving and investment rates, fast labour force growth and a rapidly expanding middle class-will ensure a steady economic performance, with little volatility in growth rates from year to year. However, despite the country'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 target for GDP growth (on a factor-cost basis) of 10% in 2011/12 to be achieved. Economic expansion will also 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.

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, although it will remain the biggest component of GDP by far. 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 our forecast for the rate of economic expansion. The possibility of a reversal of capital inflows, which have been financing India's persistent current-account deficit, also constitutes a downside risk-one that has risen in prominence as the EU sovereign debt crisis has continued to deepen.

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