The economy is in a upward swing mode, with a growth of 8.1 per cent during 2003-04. It is in a resilient mode in terms of growth, inflation and balance of payments. This combination offers ample scope for consolidation of the growth momentum with continued macro economic stability. Industry and services also assisted the GDP growth along with agricultural recovery of 9.1 per cent.

The year also marked continued maintenance of relative stability of prices. Inflation was 4.6 per cent at end March 2004, compared to 5.5 per cent average. Manufacturing sector somewhat contributed to rise in prices.

A strong balance of payments position in recent years has resulted in foreign exchange reserves reaching 119.3 billion dollars by May 2004. The focus of monetary policy during the period was on dealing with this surge in reserves. The RBI moderated the impact of these inflows through open market sale of Government's securities etc. Banks' recovery management improved considerably with better corporate debt restructuring.

The combined fiscal deficit of the Centre and the States, which had been decreasing in the early nineties, worsened subsequently to reach a level of 10.1 per cent in the Revised Estimates of 2002-03. The revenue deficit deteriorated more sharply than the fiscal deficit.

The Interim Budget for 2004-05 did not contain any fresh tax proposals. Revenue and fiscal deficits were projected at 2.9 and 4.4 per cent for 2004-05.

A significant reform initiative taken by the central government and some states has been the enactment of Fiscal Responsibility Acts. This marked as an important landmark, provides greater transparency in budget formulation and execution, and a prudent fiscal policy stance. The states include Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh. Another major institutional reform is the new pension system based on defined contribution basis, operative from January this year.

Gross domestic savings registered a growth of 24.2 per cent of GDP in 2002-03. Net domestic savings also increased proportionately. The gross domestic capital formation grew by 7.6 per cent, marginally higher with the improvement coming from capital formation in private sector.

A good monsoon helped to increase the level of food grains production from 174.2 million tones in 2002-03 to 210.8 million tones in 2003-04, contributed by increase in the production of both cereals and pulses. The prospects of agricultural production in 2004-05 are considered bright with the forecast of a normal monsoon.

Overall growth in the industrial sector improved from 5.7 per cent in 2002-03 to 6.9 per cent in 2003-04. Growth in mining, electricity and manufacturing sector helped achieve this.

The poverty ratio has been declining considerably over the years and taking this into view, the government has set a target of reduction in poverty ratio by five percentage points by 2007 and by 15 percentage points by 2012.

The government has identified five major challenges facing the economy. These are: (a) sustaining the growth momentum and achieving an annual average growth of 7-8 per cent in the next five years; (b) containing annual inflation rate to single-digit; (c) boosting agricultural growth through diversification and development of agro-processing (d) expanding industry fast, by at least 10 per cent annually to integrate not only the surplus labour in agriculture but also the unprecedented number of women and youth joining the labour force every year and (e) effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management.

The centre has identified that through the demand-supply gaps in areas such as telecom, roads and ports have been narrowing down, the inadequate availability of these facilities continues to hinder economic growth. Investment in infrastructure has been grossly inadequate and in the absence of a strongly enabling environment, the private sector has not been able to compensate for the decline in public spending in infrastructure.

Realizing that social infrastructure is equally important as physical infrastructure for enhancing welfare, the Government has given priority to education and health in its National Common Minimum Programme. Consequently, the public spending on education and health to be increased to 6 and 2-3 per cent of GDP from the Budget Estimates of 2003-04. This is expected to go a long way in addressing problems in the social sector, especially to improve the quality of publicly funded basic education and health facilities.

The government also decided to augment public investment in agriculture, particularly in rural infrastructure, irrigation and agricultural research and development. This is to reverse the declining trend in the capital formation in agriculture. The Centre also realized that the excess agricultural labour need to be absorbed in other sectors notably industry. For this agro-processing has been chosen as an area for the shift.

Industry needs to grow rapidly not only to boost the overall growth rate of the economy but also to generate gainful employment for the jobless, who are projected to add to the labour force by about 2 per cent per annum.

One of the most critical challenges confronting the Indian economic policy has been devising strategies for sustained industrial growth in excess of 10 per cent per annum to move to double-digit growth.

In a diverse range of industrial activities, several Indian firms have succeeded in getting integrated into global production chains and realized rapid growth of exports. This experience suggests that with appropriate scale, investment and technology, rapid industrial growth is indeed possible.