The central bank said on Monday that the country's stubbornly high fiscal deficit and uncertainties arising out of the war in Iraq posed risks to growth.

The government estimates the economy, Asia's third largest, will grow 4.4 per cent in the year to March 31, 2003, but has forecast that the economy would expand by 6.0-6.5 per cent in the next 12 months.

"Concerns relating to the fiscal position and international political unrest remain downside risks that could constrain growth," the Reserve Bank of India said in its report on currency and finance.

The report, prepared by the central bank's department of economic analysis and policy, added that the rising fiscal deficit was a matter of concern as it constrained increasing spending on social and physical infrastructure and poverty alleviation programmes.

The government has forecast the central fiscal deficit at 5.9 per cent of gross domestic product for the year to March 31, 2002, higher than the previous estimate of 5.3 per cent.

International rating agencies have cited India's fiscal deficit, one of the largest in the world, as a major obstacle to the economy realising its full potential.

In the external sector, a robust performance of exports and invisible earnings, despite an adverse global scenario, was reflected in a modest surplus in current account, which facilitated a record accretion to foreign exchange reserves.

Conditions in financial markets were stable with ample liquidity creating favourable interest rate environment.

The RBI report said quarterly estimates of agricultural GDP indicated a growth rate of 4.4 per cent and zero per cent in the first and second quarters of 2002-03 respectively over the same period of previous fiscal.

The services sector continues to sustain the GDP with support from knowledge-based services such as professional and technical, it said, adding this sector's share is expected to increase to 56 per cent in 2002-03 from 54.6 per cent in FY-02 in line with long-term trends.

"All the sectors, except trade, hotels, restaurants, transport and communications are expected to grow at a higher rate in the current fiscal."

The deterioration on the fiscal front continues to be a matter of concern. The gross fiscal deficit at 5.9 per cent of GDP in the revised estimates for FY-03 exceeded the budget estimate of 5.3 per cent.

Rising fiscal deficit inevitably constrains augmenting outlays on the much needed social and physical infrastructure and poverty alleviation programmes, it points out.

Recognising these issues, the Union Budget for 2003-04 has accorded priority to fiscal consolidation while addressing the basic objectives of eradication of poverty, giving a major boost to infrastructure and laying foundations for balanced and accelerated growth of agriculture and industry, it added.

The report says inflation remained moderate throughout 2002-03 notwithstanding the shortfall in agricultural production and volatility in oil prices with war risk perceptions.

The report says inflation, measured by point-to-point annual changes in wholesale price index edged up to 4.7 per cent on March 1, 2003, due to hardening of international oil prices and base effects.

On an annual average basis, inflation rate decelerated to three per cent as on March 1, 2003, from 3.9 per cent in the corresponding period of previous year.

Referring to the financial markets, which remained stable during 2002-03, the report says co-existence of adequate liquidity conditions and moderation of inflation expectations enabled softening of interest rates.

Bank rate at 6.25 per cent is now at a 30 year low. The reduction in rates during recent times has taken place across maturities despite a high fiscal deficit. "This combined with benign inflationary environment, is a welcome development, which augurs well for industrial recovery."

The government securities market witnessed a continued rally in prices of G-secs during larger part of 2002-03. Yields have, however, been firming up since mid-January in the face of international uncertainties and inching up of domestic inflation rates, the RBI said.

Foreign exchange market exhibited orderly conditions in 2002-03, with the exchange rate of the rupee trading in a narrow range. Net capital flows remained stable, particularly foreign direct investment and non-resident deposits.

These resulted in a record accretion of around $20 billion in forex reserves during 2002-03 (up to March 13), the seventh largest in the world. The improvement in external-debt indicators now places India in the “less-indebted" country category, it added.

Additional inputs: PTI