Dubai: India will be one of the growth engines in 2011 for both Asia and the world, according to the latest Strategic Focus study published by Bank Sarasin.

Nonetheless, India will not escape the global economic downturn that is expected in 2011, it said.

Consumption and capital expenditure remain the key drivers of growth while continuing robust domestic growth could cushion the Indian economy from weaker exports.

The Indian economy will have a soft landing in 2011-12 with growth to fall back to 7.5 per cent to 8 per cent from 8.5 per cent to 9 per cent in the financial year ending March 31.

Since economic growth in India was supported by robust domestic demand in the 2009 global recession, the upturn in 2010 was less spectacular than in the heavily export-oriented economies such as Singapore and Hong Kong.

As in pre-recession years, investment remained the key driver for the economy: historically low interest rates and a huge need for investment in India's still underdeveloped infrastructure ensured buoyant investment activity.

In 2011, Bank Sarasin expects that Indian foreign trade will feel the effects of the slowdown in global economic activity. This will also have an impact on the domestic economy in India because despite the strong domestic sector the confidence of Indian companies remains based on the global cycle.

Given the huge gaps in Indian infrastructure, investment will again make a positive contribution to growth in 2011. Overall, consumption should be the main growth driver and will cushion the downturn in 2011.

"Our outlook for India in 2011 provides a good overview of the opportunities offered by one of the world's largest countries as well as the challenges that it faces," Philipp Baertschi, the bank's Switzerland-based chief strategist, said in a statement to Gulf News.

"Although India's potential is not in dispute, how it faces the two main challenges — education and infrastructure — in the medium term will be crucial.

"We are optimistic for the Indian equity market in 2011 and expect an upside potential of 15 per cent to 20 per cent. The equity market valuation is high but justified by the superior earnings growth," he said.

Gradual changes

The Indian rupee is undervalued so the Indian central bank will permit a gradual appreciation, Bank Sarasin has forecast.

From a valuation perspective, the Indian rupee offers an attractive investment opportunity. However, in the short term it fluctuates very strongly and usually suffers heavy losses when risk aversion rises in the financial market.

Nonetheless losses should be limited in 2011 as the economic risks have fallen considerably in recent months, the bank said.