INDIA Economic Forecast

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The booming economy is likely to keep the United Progressive Alliance (UPA) coalition government, led by the Indian National Congress, in power in 2007-08. The prime minister, Manmohan Singh, will continue to push for economic reforms, but ultimately will also have to conduct government on a coalition basis. The outcome of the next general election, which must be held by May 2009, is likely to be another coalition government. Monetary policy will continue to be tightened in 2007, but will be eased gradually thereafter. Real GDP growth is forecast to moderate slightly to 8.3% in 2007/08 (April-March) and 8% in 2008/09. Inflationary pressures will be difficult to control. Strong domestic demand will lead to a significant widening of the merchandise trade deficit over the forecast period, but surpluses on the services and transfers accounts will limit the current-account deficit to between 1.5 and 2% of GDP in 2007-08.

Key changes from last update

Political outlook

The state election in Uttar Pradesh, India's most populous state, is being held in seven phases between April 7th and May 8th. It will be a litmus test for the political strength of Congress, but the party is finding the going tough. Rahul Gandhi, who is the son of the Congress and UPA leader, Sonia Gandhi, has met with a lukewarm response on the campaign trail. His mediocre performance raises questions as to how prominent a role he could play within the party after the next general election.

Economic policy outlook

While the latest data for wholesale prices and the recent strength of the Indian rupee may offer the Reserve Bank of India (the central bank) some comfort in its battle against inflation, further interest-rate increases during the rest of 2007 are inevitable.

Economic forecast

The rupee's new-found strength has led the Economist Intelligence Unit to revise its exchange-rate forecast to Rs43.8:US$1 in 2007 (previously Rs45.6:US$1) and Rs43.5:US$1 in 2008 (previously Rs46:US$1).