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India released its annual economic review on Monday, sounding warnings over the size of the fiscal deficit and urging strong measures to rein in public spending and accelerate market reforms.

Economic growth was expected to register 5.9 per cent in the fiscal year ending March 31, down from a provisional 6.8 per cent for fiscal 1998-99.

The Ministry of Finance's Economic Survey, tabled before Parliament on Monday, made it clear that the prospects for accelerating growth "depend crucially" on success in managing the fiscal challenge facing the economy.

"To sustain and accelerate the growth of our economy and employment, while ensuring low inflation, economic policies must combine fiscal discipline with rapid economic reforms where necessary," it said.

The survey was released before Finance Minister Yashwant Sinha's presentation of the 1999-2000 national budget in Parliament on Tuesday.

"The adverse effects of large fiscal revenue deficits on virtually every important dimension of macro-economic performance are well-known," the survey said.

In 1996-97, India's gross fiscal deficit -- combining the central and state government deficits -- was running at around 6.2 per cent of gross domestic product.

By 1998-99, it had climbed to 8.5 per cent, and "is expected to rise further in the coming year," the survey said, although the central government deficit was set to narrow slightly.

In order to properly manage the deficit, the survey said "hard decisions" would have to be taken to downsize government, reduce subsidies and step up the privatisation of state-run industry.

The fiscal situation in the current year came under "tremendous strain" due to unforseen expenditures, the survey said, citing last summer's costly border conflict in Kashmir.

On the revenue side, meanwhile, "the growth in tax collections is running below target".

The survey also bemoaned the fact that administrative practices in many economic departments remained unchanged "since colonial times" and, together with antiquated economic legislation, were out of tune with the evolving global situation.

"Many people feel that our legal system is creaking, if not collapsing, under the burden of too many laws and too little enforcement."

As well as the fiscal deficit, the survey identified India's backward infrastructure as the other major impediment to sustained economic growth.

"The unsustainable under-pricing of electric power has to be phased out sooner rather than later," it said, calling for the independence and ambit of regulatory bodies in sectors like telecommunications to be strengthened.

The survey highlighted rapid growth in India's information technology sector, but warned that dramatic reforms were necessary to eliminate looming bottlenecks to future growth.

"These include rapid progress in telecommunications, strong encouragement of venture capital finance and a liberal policy approach to laws and regulations for electronic commerce."

The survey said the country's balance of payments had survived the "twin shocks" of the Asian financial crisis and sanctions imposed after India's nuclear tests in 1998.

A relatively stable exchange rate of India's currency and a steady rise in exports by 12.9 per cent was "on par with the better performing emerging countries."

However, it added that reforms were needed in the financial sector, with "difficult decisions" needing to be taken with the problems of "weak banks" and non-performing assets.

Industrial growth was a healthy 6.2 per cent in the first nine months of fiscal 1999-2000, while agricultural growth dropped from 7.2 per cent in the first nine months of the previous fiscal year to 0.8 per cent.

As of January 29, annual inflation as measured by the Wholesale Price Index was 2.9 per cent, down from a peak of 8.8 per cent on September 25, 1998.

The Indian economy is projected to grow by 5.9 per cent in the year to March 31, as serious concerns remain over the fiscal deficit.

The growth rate compared to a provisional figure of 6.8 per cent in 1998-99 and the budgeted target of between six and seven per cent.

The document said the fiscal scenario for the first nine-months of fiscal 1999-2000 revealed a "worrisome trend."

While revenue receipts increased by 15.4 per cent, other receipts -- notably revenues earned by selling off state-run companies -- totalled a meagre $ 317 million against the targetted figure of $ 2.3 billion.

Meanwhile, government expenditure shot up by 17.8 per cent over the same nine-month period of fiscal 1998-99.

Industrial growth was a healthy 6.2 per cent, while agricultural growth dropped from 7.2 per cent in the first nine months of the previous fiscal year to 0.8 per cent.

The survey showed that the inflation rate had dropped to two to three per cent for the first time in decades.

As of January 29, annual inflation as measured by the Wholesale Price Index was 2.9 per cent, down from a peak of 8.8 per cent on September 25, 1998.

The survey said the country's Balance of Payments had survived the "twin shocks" of the Asian financial crisis and sanctions imposed after India's nuclear tests in 1998.

A relatively stable exchange rate of India's currency and a steady rise in exports by 12.9 per cent was "on par with the better performing emerging countries," it added. The performance of the infrastructure sector also showed signs of improvement, the document said, with electricity production up by 7.4 per cent.

The telecommunications sector continued to grow and new telephone connections increased by 33.4 per cent, while cargo handled at major Indian ports grew 9.2 per cent.

Total foreign exchange reserves, including gold and special drawing rights, amounted to $ 34.9 billion by the end of January, providing an import cover of about eight months.

Apart from the fiscal deficit, the survey's review of the economy was generally optimistic. "An industrial recovery seems finally to be underway from the cyclical downturn of the previous two years ... basic, intermediate and consumer goods have all shown an upward trend in growth," it said.

"The restoration of confidence in industry has been reflected in the rise in the stock market during 1999. Primary issues have increased by almost half during the first nine months of 1999-2000," the document said.

Growth in the manufacturing sector was projected to double to seven per cent in the current fiscal year.

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Economic Survey projects 5.9% growth for 1999-2000