Pushing for reforms, the Economic Survey on Thursday said inflationary impact of foreign funds flow, a slowdown in the United States, an appreciating rupee and sluggish infrastructure sector were major challenges before economy that is projected to slow down to 8.7 per cent in 2007-08.

"The new challenge is to maintain growth at these levels, not to speak of raising it further to double-digit levels," stated the Survey, a report card on the economy, presented in Parliament on Thursday.

The Survey, considered to be a report card of the government, outlined several concerns like impact of the US sub-prime crisis, loss of dynamism in agriculture, appreciating rupee eroding India's export competitiveness, deceleration in industrial growth and managing capital inflows.

The Survey, tabled by Finance Minister P Chidambaram in the Lok Sabha, suggested a slew of reform measures that alone could help raise the growth to an ambitious double-digit level. "Raising growth to double-digits will require additional reforms." These include opening retail to foreign direct investment, hiking FDI in insurance to 49 per cent, allowing 100 per cent FDI in new private rural agricultural banks, selling up to 10 per cent equity of Navratna (cash-rich) public sector units.

"There is an urgent need for a regime that supports predictable user charges, a financial system that allocates risk efficiently. . . ," it said.

The document stated that the recent hike in fuel prices would add 19 basis points to the inflation rate projected at 4.4 per cent for the year 2007-08.

"Of late, the change in the structure of the economy and its more globalised nature have made management of inflation a complex task," it said, adding that the rising capital inflows will require the Monetary Policy to play a more decisive role.

While the macro-economic fundamentals continue to boost confidence, the decisive change in growth trend also shows that the economy was "perhaps not fully prepared for the different set of challenges that accompany fast growth."

The rupee appreciation of 8.9 per cent between April 3, 2007 and February 6, 2008 affected exports in some sectors with low import intensity. Besides the rupee impact, the US slowdown is also expected to hit the exports.

"The US economy is expected to slow down in 2008, consequent to the sub-prime crises. Most projections of the world economy suggest a moderate, but not severe slowdown in world growth. This will impact both the demand for India's exports and the value of imports," the Survey stated.

It said the sub-prime crisis in the US may lead to additional capital flows into India and other emerging markets. "The situation of excess inflows is likely to remain, though the pressure on reserve accumulation and exchange rate appreciation is likely to ease," the Survey said.

In the longer term, the solution to excess capital inflows lies in deepening productivity gains and addressing the root causes like interest differential and build-up of expectations on the rupee.

The policy reforms options listed in the Survey also included allowing regulated private entry into coal mining, phasing out control on sugar, fertiliser and drugs and selling old oil fields to private sector.

It suggested private corporate investment in nuclear power, subject to regulation, and added that the state electricity regulatory commissions should notify rational and credible cross-subsidy for open access.

The Indian economy grew by 9.4 per cent in 2005-06 and moved up to 9.6 per cent in 2006-07. However, the growth has declined to 8.7 per cent in the current fiscal.

Underscoring the importance of fiscal deficit, the Survey said further reduction on this count can widen the space for monetary policy effectiveness. In the long term, a lower fiscal deficit will result in a reduction in the real domestic long-term interest rate of the economy and bring it closer to the global rates.

"A reduction in the fiscal deficit during periods of excess inflow also reduces the costs of any subsequent reversal of capital flows," it said, adding that in the short term, it can reduce the excess demand pressures created by the inflow of foreign funds.

The government document said while the inflation remained a key challenge for the monetary authorities, it cautioned that any further squeeze in credit would be detrimental to economic growth.

It also asked banks to lower their earning margins to ensure availability of credit at reasonable cost.

The Survey warned that any slowdown in farm sector would hurt the economy. It also expressed concern over the loss of dynamism in the agriculture sector which is expected to grow by a meagre 2.6 per cent during the current fiscal.

"Any deceleration in the growth of the agriculture sector is translated into a lower overall GDP growth," it said.

Concern was also expressed over deceleration of growth in manufacturing and construction. These sectors which grew by 12 per cent in 2006-07 declined by about 2.5 percentage points in 2007-08.

"The slower growth of consumer durables was the most important factor in the slowdown of manufacturing," it said.

Economic Survey 2007-08: Complete Coverage