The Indian economy grew by 9.1 per cent in first half of 2007-08, says the Mid-Term Review tabled in Parliament on Friday.

Striking a cautious note, the review said that managing copious capital flow, without hurting growth and price stability in the short-term would be a major challenge for the country.

The government warned that 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.

"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 review, tabled by Finance Minister P Chidambaram in Parliament, said that the Indian economy has been witnessing a robust growth for four years in a row now and buoyancy in the first half of this fiscal has reaffirmed continuation of this momentum.

Even as the economy has been expanding at 9 per cent and above, 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 said.

Highlighting some of the key features, the Mid-Year Review said 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 growth has generally been inclusive, with the percentage of persons below poverty line declining from around 36 per cent of the population in 1993-94 to 28 per cent in 2004-05, it said.

Sops to exporters okay in short-run

The government disfavoured providing succour to insulate exporters from a rising rupee, saying it can at best be a short-term answer and prescribed improvement in productivity as a lasting solution.

The Mid-Year Review of 2007-08, a document that reviews the outcome of budget, said that concessions were aimed at providing relief to exporters, particularly those who have been affected more by the rupee appreciation - adjusting to which may not be possible in the short-run.

"However, medium and long term solutions lie in improving productivity in exports for India to be more competitive vis-a-vis its competitors," said the document, tabled in Parliament.

The Indian currency has appreciated by 9.7 per cent against the US dollar, the main invoicing currency for trade, between April 3 and November 20, this year. It has risen 15.1 per cent in the 12 months from October 2006.

The government document, however, said that there was no one-to-one relationship between (rupee) appreciation and exports.

"Relative appreciation of the currencies of major competitors; the import intensity of the major export sectors; combination of exchange rate and inflation reflected in Real Effective Exchange Rates; and slowdown in growth of world economy/world trade affect exports," the Mid-Year Review said.

Fiscal discipline not at cost of social sector projects

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 spendings on social sector projects.

In a statement on Quarterly Review of the trends in receipts and expenditure in the first quarter of this fiscal tabled in Lok Sabha, Finance Minister P 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.

Fiscal deficit is budgeted to come down to 3.3 per cent of GDP and revenue deficit to 1.5 per cent of GDP this fiscal.

"We will further focus on expenditure management reforms, along with inflation containing interventions, while also providing the required funds for various flagship programmes and other priority sectors as per the budget estimates," he said.

During the first quarter of this fiscal, revenue deficit stood at Rs 68,646 crore, which is 96 per cent of what is estimated in the Budget for the entire 2007-08. In the corresponding period of the last fiscal, revenue deficit was 83 per cent of budget estimates, Chidambaram said.

Fiscal deficit rose to Rs 1,12,404 crore, which is 74.5 per cent of the Budget estimation for the whole of the current fiscal. At the outset, this fiscal deficit seems quite phenomenal as it accounted for 52 per cent of Budget estimates in the corresponding period of last fiscal.

However, it also includes one-off transaction comprising payment of Rs 35,531 crore by the government to RBI to acquire over 59 per cent stake in SBI [Get Quote]. This was, however, later paid back by RBI to the government.

After taking out this expenditure, fiscal deficit was marginally lower than the corresponding period of the previous year, Chidambaram said.

He attributed the mismatch in receipts and expenditure to the fact that revenues are more back loaded than expenditure, meaning that later part of the fiscal would generate more revenue.

Terming the tax revenue growth impressive, he said the government collected 28 per cent higher revenue in the first quarter, with direct taxes accounting for 40 per cent increase and indirect taxes 20 per cent.

However, growth in total expenditure at 37 per cent was sharper with plan expenditure growing by 24 per cent and non-plan, excluding those incurred on RBI's share sale in SBI, by 3.8 per cent.

The finance minister attributed non-plan expenditure to higher outgo on food and fertiliser subsidies (Rs 21,297 crore) and interest payments (Rs 34,274 crore).