In fiscal year 2010-11, India'seconomy has expanded at a rate close to that observed priorto the global financial crisis. However, growth in thesecond half of the year slowed, and the performance ofindustry and investment has been particularly disappointing.Despite some fiscal consolidation and monetary tightening,inflation has emerged as a serious concern because of itseffects on the poor, who are usually less able to protectthemselves against rising prices, and because of itsdampening effects on long-term investment, which issensitive to interest rate expectations. India'seconomic growth reached 8.5 percent, helped by a strongrebound of the agriculture sector because of good rains inthe 2010 monsoon season against the near-drought conditionsof 2009. On the external side, exports staged anextraordinary recovery and the current account deficitnarrowed, while capital flows slowed driven by a pronounceddecline in foreign direct investment. Foreign institutionalinvestment remained robust, however, and external borrowingincreased to compensate partially for the decline in ForeignDirect Investment (FDI). The rupee remained stable againstthe U.S. dollar but showed a small real appreciation againsta 36-currency trade weighted index, and Reserve Bank ofIndia foreign reserves increased to more than $310 billion.The central government budget deficit for FY2010-11 isestimated to have reached 6 percent of Gross DomesticProduct (GDP), an important contraction from the widenedfiscal stance of FY2009-10. Budget implementation benefitedfrom higher-than-expected growth in nominal GDP and relatedhigher tax intake; although the tax-to-GDP ratio is stillsignificantly lower than in FY2007-08. The spending-to-GDPratio, on the other hand, was reduced by 0.7 percent of GDPdespite two supplementary demands for grants.
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