The Reserve Bank of India's annual report, released on Wednesday, said the rate of gross domestic product growth for 2003-2004 might significantly exceed the earlier projection of about 6 per cent made in its monetary and credit policy in April.

The April projection was based on the assumption of a somewhat below normal rainfall forecast by the Meteorological department at that time.

"As per the latest assessment of rainfall conditions, a strong recovery of agricultural output is likely during the year," the report said.

This, coupled with the upturn in the industrial and services sectors, will push the growth projection to a much higher level.

The central bank will quantify the new GDP growth target in its mid-term review of the monetary and credit policy in October.

The report, however, has kept the point-to-point inflation target unchanged for the year at 5-5.5 per cent, with a warning that key commodity prices like steel and oil may firm up, although the global inflation scenario is expected to remain benign.

After three years of bearish outlook on the economy, laced with caution and warning, RBI Governor Bimal Jalan's last report card on the Indian economy bubbles with bullishness.

Even though the outlook for the global economy has become more uncertain with no let up in the US' current account deficit, the central bank is decidedly optimistic about the growth trajectory of the Indian economy.

Last year, the RBI annual report had warned that an impending drought would kill industrial recovery and hinted at a downward revision of growth projections.

In 2001, too, it scaled down the growth outlook as the industrial outlook continued to be uncertain and a cause for considerable concern.

In 2000, the report had warned that a consumption-led industrial recovery would not be able to sustain growth.

In stark contrast, the RBI this time outlines exciting prospects for the economy in 2003-2004, based on a raft of positive developments -- a well-diversified industrial recovery, renewed agricultural activities, higher export demand, strong capital flows, the ballooning foreign exchange reserves and plenty of liquidity.

The report also states that monetary policy for the year will continue to provide adequate liquidity and opt for soft and flexible interest rates.

Looking back, the RBI said although the growth was significantly lower than expected in 2002-2003, it was still among the highest in the world. Industrial activities revived, driven by export demand.

Merchandise exports grew by 19.2 per cent and the current account was in surplus for the second successive year.

The revival of industrial activities last year was led by the consumer non-durables industry. Exports of automobiles and components, chemicals, basic metals and food products were robust and retail demand in the domestic market had a multiplier effect.

"A significant development was the strong revival in the production of capital goods, heralding an improvement in the investment outlook," it said.

The momentum of industrial growth has been sustained in 2003-2004 with a strong rise in manufacturing output.

"A heartening feature of the emerging industrial sector profile is the turnaround in the consumer durables sector after 12 successive months of decline," the report said.

The RBI expects the outlook for the industrial sector to be reinforced by agricultural activities, rising export demand and a surge in capital goods production.

Taking the bullish overtone forward, the report says: "Business confidence remains positive with expectations of an increase in capacity utilisation, no major changes in employment and inventory levels and higher export orders."

The report, however, lists areas of concern. These include the growing fiscal deficits, cost and time over-runs on central projects, rising subsidies, the deterioration in the tax-GDP ratio, tardy progress in core sector projects, the problem of plenty in terms of capital flows and the growing unhedged positions of corporations in their foreign exchange exposure.

But, overall, Jalan's swan song shrugs off the pessimism that marked the last three reports. It is less cautious and more positive in its undertones.

A spirited synopsis:

New targets for 2003-04

• GDP growth significantly higher than 6%
• Inflation: 5-5.5 %
• Broad money (M3) growth: 14 %
• Non-food credit growth: 15.5-16 %

Positive signs:

• High merchandise exports at 19.2%
• Current account surplus for 2nd year
• Forex reserves of $85.4 billion
• Diversified industrial recovery
• Business confidence
• Strong revival in capital goods sector
• Comfortable food stocks
• Increase in capacity utilisation
• Buoyant capital flows and ample liquidity

Concerns:

• Financing core sector growth
• Banks' bias towards gilts
• Corporates' unhedged forex exposure
• Firming up of commodity prices
• Cost and time over-runs in project implementation
• Inflexible labour market
• Increasing subsidies

Prescription:

• Find new ways to tackle strong capital flows
• States must increase investment in core sector
• Reduce high fiscal deficit
• Cut tariffs faster