The first two quarters of the current year registered impressive growth rates of 6 per cent and 5.8 per cent, much better than 3.5 per cent and 5.3 in the corresponding periods of the previous year. The growth recovery in the first half of the current year occurred in spite of several downside risks prevailing in the domestic and international economy. 

The Economy grew by 5.6 per cent in 2001-02. It is higher than 5.4 per cent, initial estimate projected in February 2002. This is in the backdrop of a more moderate growth deceleration for 2000-2001. The rebound in growth since 2001-2002 gained momentum in the current year, in industry and services sectors, despite recurrent monsoon deficiency over the years, which has affected agricultural prospects. While industry and services are projected to achieve higher growth rates of 6.1. per cent and 7.1 per cent in 2002-03, from 3.3 per cent and 6.8 per cent in the previous year, growth in agriculture and allied sector is estimated to decline by 3.1 per cent in the current year.

Macro-economic fundamentals continue to remain stable in the current year.
Inflation remains restricted to moderate levels. The currency market remained orderly and foreign exchange reserves continued to expand. Unlike in the past, the monsoon deficiency did not result in a flare-up in prices of essential commodities. The 52-week average inflation was only 2.6 per cent in mid-January, 2003. Increase in prizes of primary product prices remained below 4 per cent for the larger part of the year, while those of manufactures were even lower. Fuel group inflation barely touched 5 per cent for much part of the year. Inflation in terms of Consumer Price Index for industrial workers dropped from 4.7 per cent at the beginning of 2002-03 to just above 3 per cent in December 2002. This is due to abundant stocks of food grains held by FCI.

In spite of the volatility observed in global currency markets after September 2001, the exchange rate of the rupee remained stable, because of timely policy interventions. During 2001-2002, the rupee experienced an average depreciation of 4 per cent against the US dollar. In the current year, after reaching a record high of Rs.49 per US dollar in May 2002, it strengthened, and appreciated by more than 2 per cent. India’s foreign exchange reserves were at an all-time high of US $ 73.6 billion at the end of January 2003 with accretion of nearly US $ 20 billion since March 2002.

After 23 years, India had a current account surplus i.e. 0.3 per cent of GDP in 2001-02. Buoyant invisible inflows were instrumental in generating the surplus. Invisibles are growing robustly in the current year too, mainly on account of heavy inflows of remittances. The possibility of recording a current account surplus for the second successive year is considerably bright, given the sharp growth recovery in exports. In April-December 2002, exports grew by 20.4 per cent. The rapid consolidation of balance of payments has resulted in the emergence of Net Foreign exchange Assets (NFA) as an important source of reserve money. Share of NFA in reserve money shot up from 78.1 per cent in 2001-2002 to 100.7 per cent by January 2003.
Easy liquidity conditions have characterized the current year. While non-food credit has picked up, interest rates have come down. The bank rate at 6.25 per cent, is at its lowest since 1973.

The cash reserve ratio also dropped to below 5 per cent. Gross and net NPAs of commercial banks, as ratios of advances and total assets, have been declining. Public Sector Banks continue to hold higher NPAs as percentage of bank advances, compared to private and foreign banks, largely due to outstanding NPAs in non-priority sectors. 
Public finances, both for the Centre as well as the States, continue to remain under pressure. The Centre’s fiscal deficit as a proportion of GDP was estimated at 5.9 per cent in 2001-02 from 5.6 per cent in 2000-2001. The combined fiscal deficit of States worsened from 4.3 per cent of GDP in 2000-2001 to 4.6 percent in 2001-2002. Revised consolidated estimates for 2001-2002 indicate a fiscal deficit equivalent to 10 per cent of GDP for 2001-02.

Fiscal Deficit
During the first three quarters of the current year, however, central finances improved, leading to a marginal improvement in fiscal deficit for April-December, 2002. Nevertheless, concerns remain over both revenue and expenditure for the remaining part of the year. While unanticipated weakening of growth momentum is likely to affect revenue collections, expenditure management will face difficulties on account of enhanced food, fertilizer, and petroleum subsidies, higher outgo on drought, shortfall in capital receipts and higher budgetary support to UTI. 

As a proportion of GDP at current market prices, gross domestic investment was estimated at 23.7 per cent in 2001-02, slightly lower than 24 per cent in 2000-01. Gross domestic savings, however, as proportion of GDP at market prices increased to 24.0 per cent in 2001-02, compared with 23.4 per cent in 2000-2001. Households continued to be the best savers.
Rising government consumption expenditure has constrained expansion of public investment. Wages and salaries, which rose sharply after the implementation of the Fifth Central Pay Commission recommendations, occupied a lower share of 10.1 per cent in total expenditure in 2001-02. However, the share of consumption expenditure in total central expenditure is budgeted to increase to more than 23 per cent in 2002-03 from less than 22 per cent in 2000-01.

Industry
The services sector is now the largest contributor of India’s GDP. The rapid rise in value addition by services to GDP in India is similar to the experiences of other Asian economies like China, Korea, Philippines and Thailand. Unlike these economies, however, India has a lower share of industry in GDP, which is expected to improve with accelerated growth and development.
The buoyant industrial performance is in complete contrast to the previous year, when agriculture was the main propellant of growth and industry was subdued. As per index of industrial production, industry grew by 5.3 per cent during April-November, 2002, underlining a broad-based recovery. A key feature of the recovery has been the turnaround by capital goods, which along with increased import of capital goods, points to a revival of domestic investment demand. 

Steel and cement industries post striking recoveries in the current year. While steel output grew by 24.5 per cent in April-November, 2002, cement production increased by 9.5 per cent in the first half of the current year. Higher export demand has also been instrumental behind the 15 per cent growth in textiles. The tourism industry after initial downslide is also showing signs of pick-up.

Automobile exports from India grew by a remarkable 68 per cent during the first three quarters of the current fiscal compared with the corresponding previous period. Like automobiles, the IT industry has also acquired pronounced global dimensions. While Indian software exports have been growing at a compound annual growth rate of more than 50 per cent for the last five years, hardware exports have also picked up. Gems & jewellery, one of the country’s traditional For-ex earners, also grew by nearly 29 per cent during April-October 2002, compared with a decline of 12.2 per cent in the previous corresponding period.

The oil and gas sector received a shot-in-the-arm after recent discoveries in the Krishna-Godavari offshore and the Rajasthan block. India exported 2.08 million tonnes of petroleum in April-October, 2002. Three new refineries under construction will add a further capacity of 24 million tonnes. Eight coal bed methane blocks have been awarded for enhancing natural gas availability.

Infrastructure
Impressive gains achieved under the National Highway Development Project have been instrumental in engineering the industrial recovery in the current year. This has created favourable linkages for key industries like cement and steel The telecom sector witnessed phenomenal growth with new telephone connections increasing by 17 per cent in the first nine months of the current fiscal. Progressively falling tariffs have expanded the cellular subscriber base to more than 10 million. The power sector despite set backs in hydel generation due to scanty rainfall, did well because of good performance in thermal and nuclear power generation. Rural electrification is proceeding fast with ten States having already reached the 100 per cent milestone. Satisfactory progress is also reported in strengthening rural infrastructure with more than 10,000 rural roads already constructed.

Agriculture
Seventeen States of the country experienced moderate to severe drought during the current year. While kharif food grains output declined by 19 per cent, commercial crops also suffered with oilseeds being the worst hit. Total food grains output in the current year is projected to come down by 13.6 per cent compared with the previous year. However, accumulated food stocks, provide considerable cushion.
According to the National Sample Survey the number of ‘chronically hungry’ households decreased from 12 to 6 per thousand in rural areas and from 7 to 2 in urban areas. Though the current year’s drought caused enhanced distress in some deficit areas, pursuit of an active food management policy helped in containing poverty and deprivation 

Issues and Priorities
The Economic Survey states that the Tenth Five Year Plan annual average growth target fixed at 8 per cent is realistic and based on India’s own experience and that of. Malaysia, Korea, Thailand and China. The decadal average annual growth rate of the Indian economy shot up to 5.65 per cent in the 1980s after hovering around 3.5 per cent in the previous three decades. 
The focus must shift to improving productivity in horticultural products encompassing a wide variety of fruits and vegetables. The intimate and virtuous interaction between technology, competition and adoption of  best international practices is amply illustrated by the consumer goods, automobiles and telecommunication sectors in the country. This needs to be extended to agriculture. In addition, it is important to focus on processing industries, specific for various agriculture products. The key to greater value addition in agriculture, and consequent income and employment growth in rural areas, lies in building up the required infrastructure, in which public-private partnership can play a vital role. 

Access to water should be an integral part of the strategy for rural infrastructure development. It is time to rethink whether the country can afford the basically wasteful practice of irrigating through field flooding and shift to more economic methods of irrigation. There is also a strong case for utilizing the services of self-help groups and micro-credit institutions in enhancing the flow of rural credit. 

Exploiting the country’s untapped export potential for agriculture requires removal of the existing regulatory inefficiencies in form of various prohibitive food standards. To create avenues for fresh private investment and greater value-addition, it is essential to amend the Agriculture Produce Marketing Committee (APMC) Act. The other areas requiring focused attention include eradication of illiteracy, reduction in infant and maternal mortality rates, eradication of diseases like malaria and polio, provision of quality transportation facilities in form of roads, railroads, ports and airports, ensuring reliable and reasonably priced power supply and safe drinking water and sanitation. Public-private partnerships should be vigorously explored for promoting infrastructure. The paradigm of the public sector should change to providing public goods and services, without necessarily producing them itself. Without immediate progress in fiscal consolidation, preemption of resources by general government can crowd out the incipient recovery in private investment.

Fiscal consolidation requires simultaneous pursuit of revenue enhancement and expenditure containment. It is essential to restructure the tax system by moving towards an impersonal and efficient tax administration. For containing expenditure, while alignment of interest rates on small savings with market rate is essential, it is imperative to address the issue of subsidies, through rationalization of food, fertilizer and LPG prices. The issue of federal fiscal transfers must be re-examined including the role of plans, gross budgetary support of plans and the likely adverse impact of plan expenditure on fiscal deficit and debt.

Efficient management of the country’s food economy continues to remain a major policy issue. While the merits of Minimum Support Price Mechanism in achieving food security is established, it is important to realize that existing procurement methods are not only seriously distorting, but also eliminating the role of private trade in food grains, thereby aggravating the subsidy burden.

India’s huge For-ex reserves make it capable of financing higher important bills in the event of a further flare-up in global oil prices. Notwithstanding a marginal compression in exports, the clear signs of revival in domestic demand and the resultant buoyancy in economic activity insulate India’s growth prospects from adverse developments in the Gulf. Nevertheless, the three issues of infrastructure, regulatory and tax reform, and fiscal consolidation, require immediate attention for establishing the foundations of sustained robust growth.