All eyes are now on the monsoon- as usual the MET has given a good forecast. Interestingly, even with the monsoon being 77% of the average last year, output was higher than 2003, when rains were normal. However, there is still the paradox of large buffer stocks, purchased at high prices and left in godowns to waste, without going to the needy. That is a problem of distribution, not production, a problem that remains unsolved. So food inflation will climb down but slowly and household budgets will continue to bear the heavy brunt of high prices this year. But high income growth should help households deal with inflation.

The Revised Estimates for 2009-10 put GDP at 7.4%, a mite higher than the advance estimates released in February. For 2010-11, we estimate growth at 8.4%, and even higher after that with the trend growth of about 10 percent through the 2010s. The Indian economy has come through the worst global crisis in decades and the worst drought since 1972 and is back on track. India?s growth trajectory has moved up, there is no doubt about this anymore. Yes, there will be road bumps, interest rates are set to rise over the next year, and this will impact manufacturing and construction. Will we get hit again, if Europe tumbles this year? Yes, but the point to note is that, short-term blips notwithstanding, we are on a long term trend of double-digit growth in any case. More importantly, we are on a higher growth track this decade, even if the government does no further reforms.

The reason for this jump is clear. To begin with, the share of agriculture has been declining in the economy, rural India is less dependent on agriculture than before ? the key word to note here is ?less?. Better connectivity with a growing rural road network, improved education levels, repatriations from migrants, NREGA payments, greater agriculture credit, higher support prices etc. have all helped in reducing volatility in rural incomes. Rural households have diversified their sources of earning, this has helped stabilize household purchases. Of course, agriculture continues to dominate in rural areas and has large enough multipliers to impact spending power, but there is more stability than before, and this is a positive trend that provides a buffer to the rural economy, even when the monsoon is poor.

But the driving force for the coming years will be the sector of transport, storage and communications. India?s road network is growing and this will only accelerate in coming years as cities and villages get connected and peri-urban centres grow in importance. By providing the much-needed continuum between villages and larger towns, new avenues are opening up for investment and markets. While airport and port infrastructure are being boosted, most importantly, a strong ecosystem has already been created for the telecom sector. So with connectivity improving steadily, forces for growth are free to take India higher.

All in all despite inflationary pressures and some increase in cost of capital, the growth trend will merrily continue its journey to reach the double digit benchmark in the very near future.

Please see accompanying graphs to this newsletter.