The report says there could also be further acceleration if structural reforms catch up. Financial reforms, including the development of a corporate bond market, pensions and insurance, will spur investment and could add up to another 1.5 per cent more to the growth rate.

''Growth justifies valuations''
In the context of India''s booming stock markets, the report states that the nation''s economic growth, the fastest in Asia after China, will help compensate for higher valuations.

Merrill Lynch, too, has raised its India rating to ''market weight'' from ''underweight'' earlier.

Money coming into the economy should not lie idle in unproductive assets and, instead, should be directed towards job creation and acquisition of economy expanding assets, it says. Standard and Poor''s (S&P) indicates that around $500 billion of petro-dollars are headed towards emerging markets, after being diverted from US. Even if India gets a meagre 5 per cent of this, it could mean up to $25 billion more of FDI inflow.

Real interest rates in India are at around 6 per cent, so Indian investors get a real return of around 3 per cent from bank term deposits. This indicates the economy is sound, say analysts, as savings would feed the growing economy. In contrast, the average nominal return on equity is around 17 to 20 per cent for the top 30 Sensex companies, indicating that investments in projects and capital expansion pay off handsomely.

Beware of market madness
However, mad bull runs in the market can effectively divert resources from productive investments to market speculation, causing huge asset bubbles. If this happens, it will set up all the latent ingredients of a South-East Asia-type crash, because a sharp slowdown in the US still has the potential to derail the Indian economy, the report indicates.

The report says that if the US economic growth rate falls by two percentage points, there could be a severe impact on India''s growth rate. It says India could be affected more than analysts expect by a US-led global slowdown, even as it hints that a US-led global slowdown is on track, with risks tilted to the downside, rather than the other way around.

The International Monetary Fund (IMF) had earlier estimated that a 1 per cent fall in the US GDP growth rate would reduce India''s growth by 0.1 to 0.2 per cent. An Asian Development Bank (ADB) 2007 estimate says it would reduce aggregate growth in Asia (minus Japan) by 0.8 per cent.

Dangers of a deep US slowdown
But the report says that India will be affected much more by US GDP growth weakening, especially if the slowdown in the US is deep. It says that India will take a bigger shock as the US growth rate slows from 1 per cent to 0 per cent, than when it slows from 2 per cent to 1 per cent.

As much as 15 per cent of India''s goods exports and around 70 per cent of India''s service exports are to the US. A sharp downturn in India''s exports is likely to have a strong impact on the domestic economy, as consumer spending takes a hit and companies reduce capex and jobs, says the Lehman report.

Indian companies have recently been sourcing a large proportion of their funds through overseas borrowing, apart from equity and commercial paper, to offset the domestic bank credit slowdown. As investors are demanding a higher premium for holding risk, there is a risk that Indian banks may sharply tighten their lending standards just at the time when firms need to increase their borrowing.

The report also points out that India is extremely vulnerable to short-term capital flight, if global risk aversion was to rise suddenly. Sharp portfolio outflows can intensify equity corrections, resulting in a strong negative effect on investor and consumer confidence, household wealth and business balance sheets.