Mumbai: The Indian economy expanded by 9.1 per cent in the first half of 2007-08 despite the monetary and financial measures to rein in inflation and curb excess inflow of capital, according to the mid-term economic review tabled in Parliament today.

The Indian economy grew at 9.1 per cent in the first half of 2007-08 and inflation eased below 4 per cent after 68 weeks, the review, tabled by finance minister P Chidambaram, said.

The review, however, cautioned that managing the huge inflows of capital without hurting growth and price stability in the short-term would be a major challenge for the authorities.

The inflow of foreign funds was more than what the economy can absorb and was leading to appreciation of rupee, a situation that could endanger growth and price stability, the review pointed out.

"Increased capital inflows can impact macroeconomic aggregates through the exchange rate, trade and monetary variables. This was particularly manifest in the first half of the current financial year and thus the management of capital inflows has been and is likely to remain an important issue," the mid-year review 2007-08 said.

The Indian economy has been witnessing a robust growth for four years in a row now and the buoyancy in the first half of this fiscal has reaffirmed continuation of this momentum.

While growth has generally been inclusive, with the percentage of people below poverty line declining from around 36 per cent of the population in 1993-94 to 28 per cent in 2004-05, the government admitted that growth needs to become more inclusive so that benefits of upswing could be shared by all sections of the society.

While the impetus to growth would continue to be provided by industry and services, growth in agriculture and absorption of labour in productive areas would need focused attention, it added.

The government also said it is also against providing sops to insulate exporters from a rising rupee, saying it can only be a short-term remedy. An improvement in productivity would be the only lasting solution, it said.

The concessions to exporters were aimed at providing relief, particularly to those who have been affected more by the rupee appreciation - adjusting to which may not be possible in the short-run, the review said.

"However, medium and long-term solutions lie in improving productivity in exports for India to be more competitive vis-à-vis its competitors," it added.

Between April and November this year the rupee has appreciated by 9.7 per cent against the US dollar. It has risen 15.1 per cent in the 12 months from October 2006.

Meanwhile, the government said it would adhere to fiscal discipline targets as laid out in the FRBM Act, but would not use it as a cover to cut social spending.

Chidambaram said fiscal discipline will be maintained by focusing on expenditure management reforms along with inflation containing interventions. However, this will not be done at the expense of the UPA government''''s flagship social welfare measures, he said.

"Notwithstanding the combined challenges of the global uncertainty associated with volatility in capital markets, and the upward pressure in international petroleum prices, the government is hopeful of maintaining fiscal discipline during the current year," Chidambaram said.

The report has projected a lower fiscal deficit at 3.3 per cent of GDP and revenue deficit to 1.5 per cent of GDP this fiscal.