India's economy will remain robust over the next two years although growth is expected to moderate in FY2011 as slower external demand and tighter fiscal and monetary policies weigh on expansion, and as high oil prices remain a threat.

ADB's flagship annual economic publication, Asian Development Outlook 2011 (ADO 2011) says gross domestic product in the year to March 2012 (FY2011) will expand by 8.2% down from an estimated rate of 8.6% for FY2010. For FY2012, growth is expected to bounce back to 8.8% as investment and overall economic activity pick up and as planned reforms move forward.

Improved agricultural output, strong private consumption, robust investment, and a pickup in exports supported growth in FY2010. At the same time, continued inflationary pressure, a pullback in private investment and structural obstacles present challenges going forward. Fiscal and monetary policies will also remain less accommodating than in the past as the government follows its fiscal consolidation road map and the Reserve Bank of India acts to anchor inflation expectations.

"India's foremost development challenge is to achieve sustainable and inclusive growth," said Changyong Rhee, ADB's Chief Economist.

To achieve these goals, the government needs to tackle structural constraints including the poor agriculture supply chain and farm productivity. A positive start has been made with programs to remove production and distribution bottlenecks for farm products and these steps should continue, the report says. Transforming manufacturing by reducing infrastructure bottlenecks and investment hurdles linked to labor regulations, land acquisition and environmental clearances should also be addressed.

"More robust manufacturing can absorb the young and growing workforce, including those shifting from farm work, with productive and well-paid jobs," said Mr. Rhee.

In the agriculture sector, output is expected to expand by 3% to 4% for FY2011 and FY2012 on the assumption that rainfall conditions are normal. After reaching an estimated 9.2% in FY2010, average annual wholesale price inflation for FY2011 and FY2012 is expected to dip to 7.8% and 6.5% as monetary policy remains tight, although elevated oil prices will remain a strong downside risk. The current account deficit is likely to widen over the next two years, driven by a deteriorating trade deficit and moderate growth in invisibles.

In FY2010, the rupee stayed relatively stable, appreciating only marginally against the US dollar. Merchandise exports, though up on a year earlier, were offset by higher oil and non-oil imports, resulting in a widening of the trade deficit to an estimated $132 billion.