Outlook for 2011-15

• Despite its lack of a reliable parliamentary majority, the Indian National Congress-led United Progressive Alliance (UPA) coalition government is expected to serve its full second term to 2014.
• Political stability will vary from one region of India to another. The violent insurgency waged by Naxalite (Maoist) groups across large swathes of central and eastern India is becoming the country's most serious security problem.
• Economic reform will continue only incrementally. The government is likely to restrict its focus to targeted spending and piecemeal changes, rather than attempting to implement more sweeping structural reforms.
• The Economist Intelligence Unit expects the government to reduce the size of the budget deficit during the forecast period. The deficit is forecast to narrow to the equivalent of 3.8% of GDP in fiscal year 2015/16 (April-March).
• Real GDP (on an expenditure basis) is forecast to expand by 8.9% in 2011/12, compared with 7.7% in 2009/10 and an estimated 9.1% in 2010/11. Growth will average 8.6% a year in 2012/13-2015/16.

Monthly review

• An Indian newspaper has published reports from a whistle-blowing website, WikiLeaks, alleging that Congress officials paid some members of parliament to back the government in a parliamentary confidence vote in 2008.
• State assembly elections are due to be held in April-May in four big states-the southern states of Kerala and Tamil Nadu, and West Bengal and Assam in the east-and in one of India's union territories, Puducherry (Pondicherry).
• On February 28th the government presented its budget for 2011/12. The budget assumes that real GDP will grow by around 9% in 2011/12.
• At its review of monetary policy on March 17th the Reserve Bank of India (the central bank) raised its main policy interest rates by 25 basis points, taking the repurchase (repo) rate to 6.75%.
• Real GDP growth (at factor cost) slowed to 8.2% year on year in October-December 2010, according the Central Statistical Organisation.
• Industrial output rose by 3.7% year on year in January, up from an upwardly revised 2.5% expansion in December.
• The value of merchandise exports surged by 49.8% year on year to US$23.6bn in February. Exports rose by 31.4% to US$208bn in the first 11 months of 2010/11.

The Indian National Congress-led United Progressive Alliance (UPA) coalition government, headed by the prime minister, Manmohan Singh, can take credit for India's strong economic growth performance, but its political standing is being severely undermined by a raft of corruption scandals and a surge in food price inflation. Furthermore, hopes that the government would be more effective in its second term (2009-14) than during its first (2004-09) have been shown to be overly optimistic, as indicated by the difficulty that the UPA has faced in passing important legislation. The ruling coalition has been hindered in this regard by the fact that it lacks a reliable working majority in the Lok Sabha (the lower house of parliament) and is in a minority in the Rajya Sabha (the upper house). Internal differences within the coalition will also continue to obstruct the government's reform efforts.

Mr Singh's government faces several challenges during the remainder of its second term, including tackling corruption, bringing down inflation, delivering more decisively on its promise of inclusive economic growth, dealing with an escalating Naxalite (Maoist) insurgency in eastern and central India and managing the uprising in the troubled Kashmir region. Each of these challenges is substantial, and the government is likely to continue to enjoy greater success in the economic sphere than in the sociopolitical realm.

Although making more demonstrable progress on fighting corruption has long been a problem for the government, the recent spate of scandals-and most notably that relating to the sale of second-generation (2G) telecommunications licences in 2008-has put a renewed spotlight on the challenge of reducing graft. Mr Singh's reluctance to investigate the telecoms licence auction sooner suggests that his administration is primarily concerned with keeping the ruling coalition together. The need to focus on governmental stability, potentially at the expense of policy and even ideology, is directly related to the rise of regional and caste-based parties in the past three decades. Alliance-building on the basis of political opportunism rather than shared policy objectives results in fragile governing coalitions, and this factor will persist as a potential source of instability in 2011-15, as the UPA will remain unable to govern without the support of regional parties and those based on caste.

Up until March, it had appeared that the corruption scandals would merely damage the Congress-led coalition government's reputation. However, allegations in March that senior Congress party leaders bribed members of parliament to ensure a favourable outcome in a confidence vote in 2008 have put even more pressure on the government and may threaten its survival. The news is likely to trigger a renewed investigation into the confidence vote. The main opposition Bharatiya Janata Party (BJP) has demanded that Mr Singh resign over the latest allegations, which were made public by a whistle-blowing website, WikiLeaks, but which appear to confirm the BJP's earlier accusation that the confidence vote was bought.

Political stability will vary from one region of India to another. The government is reviewing its counter-insurgency strategy, but the grievances that motivate the insurgents will take years to resolve. Maoist violence is likely to worsen in the forecast period. Guerrilla groups operate in most states in north-eastern India, seeking secession or demanding their own states. In addition, the security situation in the Indian-administered part of Kashmir has deteriorated markedly since mid-2010 and will remain volatile.

India faces both domestic and foreign terrorist threats. Further terror attacks could occur in 2011-15, exacerbating domestic sectarian conflict and also raising tensions with Pakistan. Political fragmentation and anti-government violence constitute serious challenges, but India's democratic institutions are firmly entrenched and resilient, with orderly and generally accepted transfers of power. The risk of political collapse is thus much lower than in many other developing countries in Asia.

The UPA does not face any immediate electoral threat, and the Economist Intelligence Unit's central forecast is still that the government will complete its five-year term (the next general election must take place by May 2014). But the extent to which the government has been weakened by corruption scandals means that the risk of a snap election-perhaps triggered by Mr Singh's resignation, should he decide to step down-has increased significantly. Regardless of when the next poll is held, it is all but certain to result in another coalition government.

Important state assembly elections in Kerala, Tamil Nadu, West Bengal and Assam will be held in the coming months. Local elections in Uttar Pradesh, India's largest and politically most important state, are due in 2012.

India's relationship with Pakistan will remain strained, despite the resumption in April 2010 of the formal peace process, which had been suspended since the November 2008 terrorist attack on Mumbai. Indian disquiet about crossborder terrorism has been one of the main obstacles to efforts to improve bilateral ties, and India remains concerned that Pakistan has acted with insufficient urgency against those that India believes to have been responsible for the Mumbai attack. Progress on bridging the "trust deficit" between the two countries will be slow, and if India suffers another terrorist attack linked to Pakistan, relations will deteriorate again.

Relations between India and China will remain tense and problematic. In December 2010 China's prime minister, Wen Jiabao, made a three-day state visit to India. The trip was a success in commercial terms, as the two sides reportedly signed business deals worth some US$16bn. However, rising strategic tensions stand in the way of significantly warmer ties between Asia's two aspiring great powers. Occasional incursions by Chinese troops into areas disputed with India will complicate the resolution of long-running border disagreements between the two countries. China has started issuing special visas to Indian citizens from two states, Arunachal Pradesh and Jammu and Kashmir (thereby implying that residents of those states have a different status from other Indian nationals), and India has introduced tighter visa requirements for Chinese workers. China claims territory in the Indian-administered part of Kashmir, while India says that China is illegally occupying part of its land. India also objects to Chinese-funded infrastructure projects in the Pakistani-administered part of Kashmir and is worried about China's military build-up in Tibet. These issues are likely to overshadow attempts to build mutual confidence and expand bilateral trade in 2011­15.

Common strategic concerns, such the wish to contain Chinese influence in Asia and the fear of a power vacuum in Afghanistan following an eventual pull-out of US troops from that country, remain at the heart of the Indo-US relationship.

The continuance of Congress as the main governing party following the 2009 general election means that macroeconomic policy in 2011-15 will remain consistent with the direction pursued in the first five years of UPA rule. Priority will continue to be given to populist measures designed to help the aam admi (common man). The concept of inclusive growth will remain central to policy. The government is also likely to pursue tax reforms, consolidation of the public finances and a reduction in fiscal stimulus measures in the medium term. The government's main economic policy preoccupation at present is high inflation; strong inflationary pressures are also worrying the Reserve Bank of India (RBI, the central bank), and its current phase of monetary tightening will continue in the first half of 2011.

Congress's more dominant role in the governing coalition following the 2009 general election, thanks to increased electoral support for the party, initially raised the possibility that economic reform might move higher up the agenda. The party's electoral mandate gives Mr Singh the ability to push for reform more effectively, but its lack of a reliable parliamentary majority means that the most likely scenario in the forecast period is the continuance of merely incremental reform, with the government focusing on areas where changes can be made without legislative action. Moreover, resistance to reform persists in the ruling party and among its core supporters, particularly in rural areas. For the most part, therefore, the government is likely to restrict its focus to targeted spending and piecemeal changes, rather than attempting to implement structural reforms that would unlock more of India's vast economic potential.

The budget for fiscal year 2011/12 (April-March), which was unveiled on February 28th, focused on maintaining momentum rather than implementing any radical policy changes. Three themes dominate the government's spending proposals: support for the farm sector, increased funding for infrastructure and measures intended to damp down inflationary pressures. Public expenditure is expected to continue to rise rapidly, as the government has announced substantial increases in spending on health, education and rural infrastructure. However, a schedule of progressive reduction of the budget deficit was outlined in the previous budget (for 2010/11), projecting that the deficit would narrow to 5.5% of GDP in 2010/11, 4.8% in 2011/12 and 4.1% in 2012/13. The 2011/12 budget retains the commitment to improving the public finances, promising, for example, the establishment of a debt-management office within the Ministry of Finance charged with enforcing fiscal responsibility.

The improvement in the fiscal position will be partly a function of rapid economic growth. The other main factors contributing to the shrinking of the deficit will be the proceeds from the government's divestment of shares in state-owned firms and auctions of third-generation (3G) telecoms licences, together with reforms to the fuel subsidy programme. The Ministry of Finance now expects the budget deficit for 2010/11 to come in at only 5% of GDP, given the success of the 3G auction and the strength of tax revenue in the first half of 2010/11. We believe that, at 4.9% of GDP, the budget deficit will miss the government's target for in 2011/12 by a narrow margin. However, rapid economic growth will cause the deficit to continue to contract steadily as a percentage of GDP during 2011-15.

Since January 2010 the RBI has been tightening monetary policy in response to stubbornly high inflation. There were five increases in the repurchase (repo) rate (the interest rate at which the RBI supplies funds to the banking system) in 2010. The repo rate was raised further in January 2011 and again in March, so that it now stands at 6.75%. We forecast that there will be a further 25-basis-point increase in the first half of 2011, lifting the repo rate to 7%. Assuming that the current surge in inflation abates, this will be sufficient to turn real interest rates positive. However, the RBI will remain mindful that higher interest rates could undermine the government's fiscal consolidation plan, encourage volatile capital inflows and exert upward pressure on the value of the rupee. Rates will be relatively stable in the second half of 2011 and during 2012, and will rise slightly in the latter years of the forecast period.

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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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After peaking at over 16% in January 2010, the annual rate of consumer price inflation moderated to 9.3% in January 2011 in response to tighter monetary policy. Inflation averaged 12% year on year in 2010, up from 10.9% in 2009. It remains uncomfortably high, raising questions about the Indian economy's ability to grow by 8% or more a year without triggering an inflationary spiral. Given the prospect of higher global food and oil prices in 2011, we have revised up our forecast for consumer price inflation this year to 8.3%, from 7.4% previously. In 2012-15 consumer prices will rise by 5-6% a year, assuming the absence of shocks such as a sharper rise in global commodity prices than we currently expect or a failure of the monsoon in any given year. Another factor that could increase inflationary pressures is the deregulation of fuel prices. In June 2010, in an effort to bolster the public finances, the government decided to end state control of petrol and diesel prices. The relaxation of price controls is a crucial step towards reducing losses at India's public-sector oil companies and containing the government's rising contingent liabilities. Our benign outlook for global oil prices in 2012-15 suggests that the government will be able to eliminate fuel subsidies entirely during the forecast period. However, in the absence of a subsidy system, any surge in petroleum prices would quickly feed through to domestic fuel costs. It is therefore possible that the government could reimpose price controls in the event of another oil price shock.

The rupee is forecast to appreciate slightly during the forecast period, from an average of Rs45.7:US$1 in 2010 to Rs42:US$1 in 2015. The rise in the currency's value will be driven primarily by strong inflows of foreign investment, attracted by India's bright economic prospects. The current-account deficit is not expected to pose a threat to the rupee, as it is forecast to average a moderate 1.7% of GDP during the forecast period. Given India's high estimated average rate of inflation in 2010 and the fairly rapid rate of price increases forecast for 2011-15, the rupee's nominal strengthening will represent a substantial appreciation in real terms, amounting to nearly 30% over the forecast period.

Although the rupee appreciated in nominal terms in 2010, it is vulnerable to a number of downside risks. It will continue to be exposed to the inherent volatility of portfolio investment inflows. A bout of the jitters on the part of foreign investors might trigger a sharp fall in the rupee's value and could wipe out the modest gains in nominal terms that the currency is expected to make in 2011-15. The rupee could also be susceptible to downward pressure on its value if inflation runs out of control or the government fails to enforce greater fiscal discipline.

The current-account deficit is forecast to narrow to 1.2% of GDP in 2015, from an estimated 2.5% in 2010. Substantial capital inflows will ensure that the shortfall on the current account poses little risk to the economy, and India will continue to accumulate foreign-exchange reserves. Merchandise exports and imports will both expand rapidly in 2011-15: exports will grow at an average annual rate of 13.2%, while imports will rise by 13.4% a year. As a result, the trade deficit will widen to US$243.9bn in 2015, from an estimated US$128.9bn in 2010. Strong growth in merchandise exports and imports in the five-year period will reflect not only robust growth in domestic demand but also the further opening of the Indian economy to international trade and global production systems. The expansion of the country's manufacturing capacity will boost its export performance as well as leading to increased demand for raw materials, while booming domestic demand will underpin sustained rapid growth in imports of consumer goods.

Services exports will continue to play a vital role in the country's external trade as information technology (IT) and business-process outsourcing continue to lure Western companies to India. Having built up supplier relationships, India's IT companies are expected to carry on growing rapidly, and the most sophisticated of them will continue to move quickly up the value added chain. Services exports are forecast to grow by 17.9% a year on average in the forecast period, enabling the services surplus to increase to US$118.8bn by 2015, when the value of services exports will be equivalent to almost two-thirds of revenue from merchandise exports. The income deficit, which is small at present, will widen steadily to nearly US$40bn in 2015, reflecting an increase in the repatriated profits of foreign companies operating in India. The current transfers balance will stay positive, rising to US$117.8bn in 2015, driven by strong growth in remittances from Indian workers overseas.

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The political scene continues to be dominated by a slew of corruption scandals that have shaken the Indian National Congress-led United Progressive Alliance (UPA) coalition government. Persistently high rates of inflation, as well as preparations for important elections in four Indian states and one union territory scheduled for April-May, are also turning up the political heat.

The prime minister, Manmohan Singh, has admitted to an "error of judgement" in appointing Polayil Joseph Thomas as the head of India's anti-corruption watchdog, the Central Vigilance Commission, in 2010. Mr Thomas was forced to resign in early March after the Supreme Court overturned his appointment on the grounds that he himself faced charges of corruption. The government stands accused of acting too timidly on corruption, and has been struggling for months to restore its damaged reputation. Allegations of corruption-against politicians, among others-are so pervasive that the government must fear that attempting to end India's long-standing culture of impunity could threaten the stability of an already weakened government.

Another damaging blow to Congress's apparent attempt to sit out the scandals came in mid-March, when a daily newspaper, The Hindu, published contents of a US diplomatic cable obtained by a whistle-blowing website, WikiLeaks. According to the cable, a political aide to a senior Congress party politician, Satish Sharma, told a US embassy official that Congress officials had paid a number of members of parliament US$2.2m each to back the government in a parliamentary confidence vote in July 2008. Mr Sharma is a close associate of a former prime minister, Rajiv Gandhi; the current Congress party president, Sonia Gandhi, is Mr Gandhi's widow. The publication prompted Mr Singh to deny publicly that any member of the party or the government "had indulged in any unlawful act during the trust vote". The revelations are potentially grave, as the reported improprieties appear to implicate the Congress leadership generally. This stands in contrast to the biggest corruption scandal currently being investigated, which concerns the sale of telecommunications licences in 2008. This affair involved just one former member of the coalition government, A Raja, who was telecommunications minister at the time.

Meanwhile, amid the raging controversy and recriminations centring on corruption, parliament has found itself hamstrung. The government is likely to be concerned that the confrontation surrounding various graft scandals has made bipartisan support for a number of reform-oriented bills even more difficult to secure than it otherwise would have been. These measures include the Banking Laws (Amendment) Bill; the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Amendment) Bill; the Constitution (Amendment) Bill-Goods and Services Tax; the Mines (Amendment) Bill; the Land Acquisition (Amendment) Bill; and the Rehabilitation and Resettlement Bill. Parliament is expected to pass the budget for fiscal year 2011/12 (April-March) during the current legislative session (the government tabled the budget on February 28th). But the passage of the other bills will almost certainly prove impossible, not only because legislators are currently being distracted by the corruption controversies, but also because the current session of parliament has been shortened on account of the forthcoming state and union territory elections.

State assembly elections are due to be held in April and May in four big states-the southern states of Kerala and Tamil Nadu, and the eastern states of West Bengal and Assam-and the union territory of Puducherry (Pondicherry). The state elections will not alter the situation in the federal parliament, where the UPA government has 272 seats in the 543-seat Lok Sabha (the lower house), giving it a narrow majority. However, they are likely to determine the degree of political influence wielded in future by two of Congress's main allies, the Dravida Munnetra Kazhagam (DMK) in Tamil Nadu, and the Trinamool Congress in West Bengal. In early March the DMK, which holds 18 seats in the federal lower house and leads the state government in Tamil Nadu, threatened to quit the UPA in an apparent attempt to extract concessions from Congress. But the two parties managed to reach a deal over a seat-sharing arrangement, and the DMK retracted its threat. (Congress forced the DMK to accept its demand to contest 63 seats in the 234-member Tamil Nadu state assembly; the DMK had initially demanded that Congress run in only 60 constituencies, leaving the remaining seats to be contested by the DMK.)

The West Bengal poll is also crucial. The leader of the Trinamool Congress and federal railways minister, Mamata Banerjee, hopes to unseat the Left Front, the alliance of left-wing parties that currently governs West Bengal and is led by the Communist Party of India (Marxist), or CPI (M). The Trinamool Congress is also Congress's biggest ally at the federal level, with 19 seats in the Lok Sabha. It swept West Bengal in the 2009 general election owing to widespread resentment there of the CPI (M), owing to the fact that the latter was perceived to have mishandled land acquisitions in the state. On March 21st this year Congress and the Trinamool Congress agreed to fight the West Bengal election together, but Congress was forced to make concessions regarding the number of seats that it will contests in the state. Under the deal, Congress will run in 65 seats (out of a total of 294), compared with its initial demand to compete in 98 seats. The agreement reflects Congress's limited negotiating power with a crucial ally.

In Assam, Congress appears well placed to retain power. In Kerala, it hopes to oust the CPI (M), which has governed in the state since 2006, when it ousted a Congress-led coalition government.

On February 28th the government presented its budget for 2011/12. The UPA plans to reduce the central government's fiscal deficit from an estimated 5.1% of GDP in 2010/11 to 4.6% in 2011/12. The deficit in 2010/11 is estimated to be lower than the official target of 5.5% of GDP, largely because of windfall revenue from the sale of third-generation (3G) telecoms licences early in the current fiscal year. High inflation in 2010/11 has also boosted nominal GDP, thereby flattering the budget deficit figure when expressed as a percentage of GDP. Further fiscal consolidation is planned for the medium term, with the deficit projected to fall to 3.5% of GDP in 2014/15. In 2011/12 total expenditure is set to rise by 3.4% in nominal terms compared with the revised estimates for spending in 2010/11. However, in real terms this amounts to a significant degree of fiscal retrenchment.

The assumptions underlying the budget are optimistic. The document assumes real GDP growth of around 9% (plus or minus 0.25 percentage points) in 2011/12. Wholesale price inflation is expected to fall to an average of 5%; this projection assumes a good monsoon and a moderation of global commodity prices from their high current levels. These assumptions may be unrealistic, however. Given the government's planned fiscal retrenchment, rising interest rates and a global environment that remains challenging, the forecast rate of economic growth in India is subject to significant downside risk.

The main budgetary risk is that the government's revenue and spending projections will be undermined by unexpectedly slow growth. The government projects that corporate tax collection will rise by 21.5% in 2011/12 (marginally faster than in 2010/11) and that excise tax revenue will increase by 19% (compared with estimated growth of 33% in 2010/11). Critics say that the latter target is particularly optimistic, given that in the past decade revenue from excise duty has grown by more than 12% in only one fiscal year-namely 2010/11, when the central excise duty rate was raised from 8% to 10%.

Budget assumptions

• Real GDP growth is forecast at 9% (plus or minus 0.25 percentage points)
• Wholesale price inflation is forecast at 5%
• The central government fiscal deficit is forecast at 4.6% of GDP, narrowing from an estimated 5.1% in 2010/11. The deficit is projected to shrink to 4.1% in 2012/13 and 3.5% in 2013/14
• Disinvestment proceeds are expected to rise by 76%, to Rs400bn (US$9bn)
• The tax to GDP ratio is projected to rise to 10.4% in 2011/12 and 10.8% in 2012/13

Spending proposals

• Infrastructure spending is to rise by 23.3%, to Rs2.1trn (US$46.7bn)
• Defence spending is to be increased by 12%, to Rs1.6trn
• The rural infrastructure development fund is to be raised to Rs180bn
• Social sector spending is to increase by 17%, to Rs1.6trn
• A raft of measures are to be introduced to boost the agricultural sector

Tax policy

• The personal income tax exemption limit is raised from Rs160,000 (around US$3,500) to Rs180,000
• The standard rate of excise duty and services tax is held at 10%
• The scope of services tax is to be widened
• The main corporate taxes are unchanged, but the minimum alternate tax on book profits is raised from 18% to 18.5%

Reform proposals

• A food security bill is to be introduced in 2011/12
• Infrastructure debt funds are to be created
• Infrastructure growth is to be boosted with tax-free bonds of Rs300bn
• The foreign institutional investor limit in five-year corporate bonds for investment in infrastructure is to be raised by US$20bn
• There are plans to permit mutual funds registered with the Securities and Exchange Board of India to access subscriptions from foreign investments
• A public-debt bill is to be introduced in parliament

At its review of monetary policy on March 17th the Reserve Bank of India (RBI, the central bank) raised its main policy rates by 25 basis points. The repurchase (repo) rate now stands at 6.75%, while the reverse repo rate is now at 5.75%. Several factors are likely to have led the RBI to push up interest rates again despite signs of a moderation in economic activity. First and foremost, inflation remains above the RBI's target rate of 5%. Wholesale price inflation rose unexpectedly to 8.2% year on year in January, and it appears unlikely to fall to 7% by March as the RBI had hoped. The rate of wholesale price inflation in December has been revised up to 9.4%, from 8.4% initially. India's provisional wholesale price data are often adjusted upwards, and this means that inflation in January and February is also likely to have been higher than the provisional figures suggest. There is also concern that inflation will spread beyond food items (currently the primary driver of rapid overall inflation) and will begin to push up wages and the price of industrial inputs as well. In February manufacturing inflation reached 4.9% year on year, up from 3.8% in January.

The RBI is also likely to have taken into consideration the government's plans to continue to deregulate diesel prices-a move that will inevitably add to inflationary pressures. High international oil prices have pushed up India's oil import bill and, with it, domestic inflation. These factors, combined with a recent sharp fall in foreign direct investment (inflows of which dropped by 48% year on year in January), have weighed on the value of India's currency, the rupee. The possibility of a weaker rupee in 2011 is likely to have been another factor behind the RBI's decision to raise interest rates, as a weaker local currency would boost imported inflationary pressures. The central bank's next scheduled monetary policy meeting is on May 3rd.

Real GDP growth (at factor cost) slowed to 8.2% year on year in October-December 2010, according the Central Statistical Organisation. This compares with quarterly expansions of 8.9% in both the first and second quarters of 2010/11. The latest quarterly national-accounts data are in line with a raft of economic indicators showing that although it is still growing strongly, India's economy has lost momentum since the start of 2010/11. At 1.7 percentage points in October-December, the industrial sector's contribution to GDP growth was down considerably compared with previous quarters. The services sector continues to account for the great bulk of economic expansion: its contribution to GDP growth in October-December stood at 4.9 percentage points. Agriculture meanwhile contributed more than usual to growth as the farm sector expanded by a robust 8.9% year on year. This was helped by a low base, as agricultural output had declined by 1.6% year on year in October-December 2009.

The OECD's monthly leading indicator for India recorded a further fall in January. The indicator dropped from 99.7 points in December to 99.3 in January (100 indicates average long-term growth). The OECD's "growth cycle outlook" is for an economic slowdown in India. By way of comparison, China's outlook is for a "possible moderate downturn", while that of Brazil is for a "stable pace of expansion". Russia, a major oil producer, is the exception among the so-called BRIC countries (Brazil, Russia, India and China), with an outlook of "expansion".

According to the OECD's analysis, India's business cycle peaked in March 2007, dipped to a trough in February 2009 and then bounced back to reach another peak in February 2010. Since then, the pace of economic expansion has slowed. However, more recent economic data suggest that activity in the manufacturing and services sectors regained strength in February. According to the HSBC Purchasing Managers' Index, manufacturing activity accelerated in February in response to new orders, with the index rising to 57.9, from 56.8 in January. In February the services sector expanded at its fastest pace in seven months (despite rising input prices), helped by steady growth in new business. The HSBC Markit Business Activity Index rose from 58.1 in January to 60.2 in February, to chalk up its 22nd consecutive month of expansion.

Industrial output rose by 3.7% year on year in January, up from an upwardly revised 2.5% expansion in December. The reading was the strongest for three months. However, output grew at less than one-half of the pace of 8.3% recorded between April 2010 and January 2011. That said, the figure for January understates the momentum of India's industrial economy, as this growth follows a very rapid rate of expansion in the year-earlier period, at 16.8%.

Manufacturing production rose by 3.3% year on year in January, while mining output grew by 1.6%. Electricity output, which increased by 10.3%, grew twice year on year as fast as it did between April 2010 and January 2011. However, concerns about the strength of the industrial economy persist. Capital goods production fell by 18.6% year on year in January, suggesting a slowdown in investment demand. As has been the case throughout 2010/11, production of consumer durables surged, rising by 23.3%. Output of consumer non-durables, which has been almost flat in recent months, grew by 6.9%.

The value of merchandise exports surged by 49.8% year on year to US$23.6bn in February, according to data from the Ministry of Commerce. Exports in the first 11 months of 2010/11 rose by 31.4%, to US$208bn. With only one month of data still to come for the current fiscal year, export values are expected to meet or exceed the government's target of US$220-225bn (revised up from US$200bn originally) in 2010/11. The surge in exports is particularly welcome at a time when rising food and oil imports have put pressure on the trade and current-account deficits. The commerce secretary, Rahul Khullar, has said that the current-account deficit will probably stand at 2.5-2.8% of GDP in 2010/11. The value of merchandise imports in February was up 21.2% year on year, to US$31.7bn. Imports from April 2010 to February 2011 were up by 18%, to US$305bn. Mr Khullar expects a trade deficit in the range of US$105-115bn in 2010/11 as a whole.

Inflation as measured by the wholesale price index rose unexpectedly, to 8.3% year on year, in February, compared with 8.2% in January. The index for primary articles, including food items, rose by 14.7% in February, compared with a larger rise of 17.3% in January. Within that category, food inflation fell to 10.5% in February, from 15.7% in January, but non-food inflation accelerated sharply, to 30.2%, from 23.9% in the previous month. The year-on-year inflation rate for December was also revised up, to 9.4%, from a provisional estimate of 8.4%.

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Land area

3,287,263 sq km (including Indian-administered Kashmir); of the total, 57% is agricultural land and 16% is forest area

Population

1.13bn (mid-2007)

Main towns

Population in millions, 2001 census

Mumbai (Bombay): 16.4

Kolkata (Calcutta): 13.2

Delhi: 12.8

Chennai (Madras): 6.4

Bangalore: 5.7

Hyderabad: 5.5

Climate

Varied; humid subtropical in Ganges basin, semi-arid in the north-west, tropical humid in north-east and most of the peninsula, tundra in the Himalayas; all areas receive rain from the south-west monsoon in June-September; the south is also served by the north-east monsoon in January-March

Weather in New Delhi (altitude 218 metres)

Hottest month, May, 26-41°C (average daily minimum and maximum); coldest month, January, 7-21°C; driest month, November, 4 mm average rainfall; wettest month, July, 180 mm average rainfall

Languages

Hindi is the national language and the primary tongue of 30% of the population. There are 14 other official languages: Bengali, Telugu, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi and Sanskrit. English is widespread in business circles and as a second language

Religions

Hindu (80.5% in 2001 census); Muslim (13.4%); Christian (2.3%); Sikh (1.9%); Buddhist (0.8%); Jain (0.4%)

Measures

Metric system. Numbers are often written in lakhs (100,000) and crores (10m)

Currency

Rupee (Rs); Rs1 = 100 paisa. Average exchange rate in 2010: Rs45.7:US$1

Fiscal year

April 1st-March 31st

Time

5 hours 30 minutes ahead of GMT

Public holidays

Republic Day (January 26th); Independence Day (August 15th); Mahatma Gandhi's birthday (October 2nd); also major Hindu, Muslim, Christian and other religious holidays

Official name

Republic of India

Form of state

Federal republic, with 28 states and seven union territories

Head of state

The president, Pratibha Patil, was elected in July 2007 for a five-year term by the members of the central and state legislatures

The executive

The prime minister presides over a Council of Ministers chosen from the elected members of parliament

National legislature

Bicameral. The Rajya Sabha (the upper house) has 245 members-233 elected by weighted votes of the elected members of parliament and the legislative assemblies of states and union territories, and 12 appointed by the president. The Lok Sabha (the lower house) has 545 members-543 elected from single-member constituencies (79 seats are reserved for "scheduled castes" and 40 for "scheduled tribes"), and two representatives of Anglo-Indians appointed by the president

State legislatures

Unicameral or bicameral, with elected members; state governors are appointed by the president

Legal system

Based on the 1950 constitution and English common law

National government

The United Progressive Alliance (UPA), a coalition led by the Indian National Congress, won the largest number of seats in the 2009 general election and formed a government

National election

The most recent Lok Sabha election was held in April-May 2009; the next is due by May 2014

Main political organisations

Indian National Congress; Bharatiya Janata Party (BJP); All India Trinamool Congress (TMC); Dravida Munnetra Kazhagam (DMK); Samajwadi Party (SP); Rashtriya Janata Dal (RJD); Janata Dal (United); Bahujan Samaj Party (BSP); All India Dravida Munnetra Kazhagam (AIADMK); Bijou Janata Dal (BJD); Nationalist Congress Party (NCP); Communist Party of India (Marxist), or CPI (M)

Prime minister: Manmohan Singh (Congress)

Key ministers

Agriculture, consumer affairs, food & public distribution: Sharad Pawar (NCP)

Commerce & industry: Anand Sharma (Congress)

Communications & information technology: Kapil Sibal (Congress)

Defence: A K Antony (Congress)

External affairs: S M Krishna (Congress)

Finance: Pranab Mukherjee (Congress)

Heavy industries & public enterprises: Praful Patel (NCP)

Home affairs: P Chidambaram (Congress)

Information & broadcasting: Ambika Soni (Congress)

Law & justice: M Veerappa Moily (Congress)

Petroleum & natural gas: Jaipal Reddy (Congress)

Power: Sushilkumar Shinde (Congress)

Railways: Mamata Banerjee (TMC)

Road transport & highways: Kamal Nath (Congress)

Steel: Beni Prasad Verma (Congress)

Central bank governor

Duvvuri Subbarao