Global investment bank Lehman Brothers, on Tuesday, projected Indian economy to grow at 10 per cent in the coming decade provided it continues with structural reforms process.

The bank, in its report, also forecast Indian stock markets, would outperform developed and emerging markets over next five years and 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 country’s ability to take forward structural reforms. The growth projection could also be impacted by global economic downturn, though Indian economy is not much affected by it.

However, structural changes are much more important than global economic cycle, it 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 prudent macro-management. While business continues to prove impressively adept at working around systemic and structural challenges, sustaining higher growth in 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.

Attractive returns
Although bourses have been clocking stupendous growth and are reaching levels where short-term potential for 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. As per the report’s assessment, returns between 12-20 per cent could be expected in over the next five years. Total market capitalisation stands at $1.1 billion, on par with South Korean and Italian markets. However, as a proportion of GDP, the Indian market, at 89 per cent, stands above most other large emerging markets such as China (43 per cent), Brazil (68 per cent), Mexico (41 per cent), Poland (44 per cent) and Turkey (55 per cent), with the exception of Russia (98).

The strength of India’s productivity growth and rising differential with Asia (including Japan) and against the US will provide more support to appreciation of long-term real effective exchange rate of the rupee. This rate is still only 7.3 per cent stronger in the first half of 2007 than the previous ten-year average (Figure 120), suggesting there is ample space for the rupee to appreciate further.