Nomura: India Economic Outlook 2011: The consolidation year

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Activity: We expect real GDP growth to consolidate at 8% in FY12F (fiscal year
ending 31 March 2012) after a strong 8.7% in FY11F due to three factors. First, we
expect growth in agricultural output to normalise and year-on-year growth to be pulled
lower by adverse base effects. Second, we expect growth in government consumption
to slow after above-average increases since the onset of the financial crisis. Third, we
expect net exports to be a larger drag on growth as imports pick up in line with
improving domestic private demand. We forecast underlying private demand – both
investment and private consumption – to remain strong. We expect private
consumption to remain supported by rising wages and strong rural demand and
investment to be led by infrastructure, real estate and services-sector capex.

Inflation: We expect headline WPI inflation to remain elevated, averaging 7.5% in
FY12F, despite favourable base effects. We see inflation remaining sticky, due to what
we see as a structural rise in commodity prices (we build in a 15% rise in the CRB
index) and a closing output gap, which should result in greater demand-side inflation.
We expect inflation to bottom in 4Q FY11F and start to climb from the 6%-handle in 1H
FY12F to above 7.5% in 2H FY12F.

Policy: We expect inflation to persistently exceed the Reserve Bank of India’s (RBI)
comfort zone of 5.0-5.5%, prompting 75bp of rate hikes in FY12F. This will come on
top of the aggressive 150bp of hikes in CY2010, shifting the monetary policy stance to
modestly tight. In terms of profile, we expect the RBI to deliver a 25bp rate hike in
January 2011, followed by a pause, before resuming with a 25bp hike each in 2QFY12,
3QFY12 and in 4QFY12. On the fiscal front, with less scope for proceeds from asset
sales and high subsidy burden, we expect the central government’s fiscal deficit at
5.2% of GDP in FY12F, above the required target of 4.8%.

Risks: A reversal in capital flows and lack of an investment revival are downside risks.
A sharper-than-expected global rebound and falling commodity prices are an upside
risk to our growth outlook.