This is the first time that the RBI is admitting that the GDP forecast is likely to be lower than the targeted growth rate of 6.1 per cent set at the beginning of the fiscal. The GDP growth in 1997-98 was 5.1 per cent.

The central bank, in its Report on Currency and Finance 1997-98, has said the slow growth in industry has clouded the prospect of achieving a rate of growth of six per cent, which was visualised at the time of the mid-term review of credit policy in October 1998. ``Up toend-October 1998, industrial growth turned out to be significantly lower at 3.6 per cent, compared to the 6.2 per cent in the corresponding period of last year,'' the RBI said adding that the manufacturing sector registered a growth rate of only 3.8 per cent (6.2 per cent) during the period "despite a strong showing by the electricity generation group".

On the other hand, the rise in prices of primary commodities and the rate of inflation increased uncertainty about output growth and the high growth of money supply (despite substantial increase in CRR and short term interest rates during the year) are also matters of serious concern, the central bank noted. While money supply expanded by 19.5 per cent, the inflation rate was 6.35 per cent (as on November 28, 1998) as against 3.84 per cent in the same period of last year.

Regarding the Central government's finances, it said the financial position of the centre during the current year so far (April-October 1998) reflects a a sharp rise of 28.5 per cent inrevenue expenditure while the growth in revenue receipts was only 11.7 per cent. The revenue deficit at Rs 30,590 crore in the first seven months amounted to about 64 per cent of the budget estimates for Rs 48,068 crore for the whole year.

Moreover, net tax revenue during the first seven months of 1998-99 recorded a sluggish growth of 8.6 per cent, much lower than 17.8 per cent projected in the budget. Aggregate expenditure, on the other hand, recorded a substantial increase of 29 per cent as compared with 16.6 per cent during the same period last year and 13.9 per cent envisaged in the budget estimates.

Coming to the poor fiscal position of States, the RBI said all the major deficit indicators -- revenue deficit, gross fiscal deficit and primary deficit -- of the States have showed a sharp rise in 1998-99. Stating that the sharp deterioration in the States' deficit breaks the past trend witnessed since 1990-91, the RBI said States have also been facing problems with liquidity management with many Statesresorting to overdrafts from the Reserve Bank in 1998.

According to the RBI, UP with a fiscal deficit of Rs 10,707 crore and Maharashtra (Rs 7,148 core) top the list of States with poor financial management. Other states which are anticipated to show high fiscal deficit in 1998-99 are Bihar (Rs 3,898 crore), Tamil Nadu (Rs 4,471 crore) and West Bengal (Rs 4,355 crore). In fact, these five States taken together would account for almost 52 per cent of the gross fiscal deficit of all States.

The revenue deficit of States increased by 27.7 per cent to Rs 19,636 crore over the estimated level of Rs 15,373 crore, the RBI report said. ``A worrisome feature of State finances in 1998-99 is the significant rise in the overall borrowing requirement with the revenue deficit being budgeted to absorb 43.2 per cent of the gross fiscal deficit as against 38.5 per cent in 1997-98,'' the RBI said.

The RBI said the external sector developments, particularly in respect of trade, continue to be sources of concern andagainst this background, it is more necessary to pursue policies that encourage growth with external stability and to enhance competitiveness of the economy. While the South-east Asian crisis has shown some signs of relative containment, other external developments such as the overall global economic slowdown, the inadequacy of stimulus in the Japanese economy and the Russian economic problems have made the external environment uncertain and unfavourable for growth, the report said.

On the domestic front, agricultural performance has not shown indications of a strong recovery, though latest available indications suggest that agricultural output will be significantly higher than in the previous year. After displaying an impressive performance in 1996-97, agricultural production suffered a setback during 1997-98 declining by 5.9 per cent against a growth of 9.5 per cent the preceding year. ``Due to incidence of heavy rain, floods and cyclones, kharif crop may not yield as much outturn as was originallyexpected,'' the RBI said.

The Reserve Bank has said that there was need to pursue all round economic reforms and productivity improvements in a time-sequenced and balanced manner to make macro-economic and structural policies mutually supportive.