Mumbai: Global investment bank Lehman Brothers on Tuesday projected Indian economy to grow at 10% in the coming decade provided it continues with structural reforms process, a political challenge that the incumbent coalition polity faces.
The investment bank in its report released on Tuesday also forecast that Indian stock markets, already on record high, would outperform developed and emerging markets over the next five years and the rupee will continue to rise significantly against the dollar.
The report, titled “India: Everything to Play For,” however, based its projections of Indian economic growth on the country’s ability to take forward the structural reforms.
“However, pushing through structural reforms will remain a political challenge in the face of headwinds from vested interest and coalition politics. That said, there should be a new window for reform after the next general election due in 2009,” Lehman Brothers said.
The growth projection could also be impacted by global economic downturn, though Indian economy is not much affected by it.
“Naturally, a sharp global economic downturn is a risk to India’s near-term economic growth. While India is one of the least vulnerable economies, it is not immune.
“Conversely, a period of demand running ahead of supply cannot be ruled out, raising risks of short-term overheating,” the report said.
However, structural changes are much more important than global economic cycle, the report said adding they would contribute to capital deepening and rising productivity.
The structural changes include development of financial system, trade and capital account liberalisation and more prudent macro-management.
While business continues to prove impressively adept at working around systemic and structural challenges, sustaining higher growth in the medium term will require continued structural reform.
Lehman Brothers also said given the prospects of a sustained high rate of nominal and real economic growth, the Indian stock market should perform very well over the medium to long term.
Although the bourses have been clocking stupendous growth and are reaching levels where the short-term potential for the market might seem lower than it has been over recent years, continued growth in GDP and earnings should mean that investors can still achieve solid returns, it said.
As per the report’s assessment, returns between 12%-20% could be expected in the stock markets over the next five years.
Total market capitalisation stands at $1.1 billion, on par with the South Korean and Italian markets.
However, as a proportion of GDP, the Indian market, at 89%, stands above most other large emerging markets such as China (43%), Brazil (68%), Mexico (41%), Poland (44%) and Turkey (55%), with the exception of Russia (98%).
The strength of India’s productivity growth and rising differential with Asia (including Japan) and against the US are likely to provide more support to appreciation of long-term real effective exchange rate of the rupee.