INDIAN ECONOMY-ON THE TRACK BY MANSUKH NOV 2010

India´s economy chalked up impressive real GDP expansion of 8.6% year-onyear(y-o-y)(and 13.4% saar quarter-on-quarter [q-o-q]) in Q110 (Q4 FY 2009/10).The quarterly outturn helped to propel full fiscal year growth to 7.4% in FY 2009/10 (April-March).While we believe headline expansion should cool going forward, India´s domestic demand-driven economy and a lack of direct exposure to the Chinese economy should propel real GDP growth to a robust 7.8% for both FY 2010/2011 and FY 2011/2012. With the economy well on track,the government will need to address pressing internal security issues as well as the urgent need to boost the country´s infrastructure capacity. The success of policies on all these issues will undoubtedly help shape the country´s long-term economic prospects,on which we remain bullish overall, penciling average real GDP growth of 7.7% over the next decade.

In the 12 months since the ruling United Progressive Alliance (UPA) won the general elections in 2009, the Indian economy has performed well and,notably,steps are being taken to address the fiscal situation.In particular,we point to the In particular,we point to the removal of fuel subsidies that will have a significant positive impact on the government budget for the longer term.Despite success on the economic front,the UPA still faces considerable challenges in the form of a resurgent Naxalite threat and still-frosty relations with Pakistan.

India´s real estate market has recovered strongly over the last three quarters,sparking fears that emerging Asia´s second-largest economy might be facing a reflated property bubble.In our view,although there are parallels to be drawn with the Chinese property market (on which we are decidedly bearish), we argue that India faces comparatively more benign macroeconomic conditions over the medium term.Therefore,we are in favour of price stability in the residential market over the next year,noting that the bulk of price increases might be behind us. For commercial real estate,ample upcoming supply for the retail and commercial segments should limit rent increases in the coming quarters.

Awaiting February 2010 (as per the 2004-05 WPI series), food and textiles contributed more than 60% of the overall 9.7% WPI inflation on account of the drought-driven increase in the prices of food grains, sugar and cotton, among others. By August 2010, their contribution to the 8.7% WPI, though still high at 47% was on a downward trend. Oil's contribution to overall inflation increased to 18% from 13%. Contribution of other items (having more than 54% weightage in the WPI index) increased to 37% in August 2010 due to the increased prices of coal, metals, electricity and wood products among others, indicating that inflation is becoming more broad based. Over the next few months, we expect inflation to continue to moderate from the peak levels seen in the recent months. underrepresented in GDP.