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The economy has experienced a broad-based slowdown and growth is expected to remain weak for
some time. The current account deficit has narrowed as imports have softened on account of cooling
domestic demand and a weaker rupee. Inflation has temporarily been pushed up by hikes in regulated
petroleum prices but is expected to decline as spare capacity mounts. This will create room for easing
monetary policy, which has been hindered by persistently high inflation and a widening fiscal deficit.

Recent moves to liberalise foreign direct investment in some sectors, including retail and aviation,
have boosted business sentiment somewhat and will promote higher investment and productivity over
the medium term. The fiscal position has weakened as tax revenues have been hit by the slowdown
and spending has overshot. Spending restraint is needed to ensure that fiscal slippage is limited and
confidence does not suffer further on account of policy uncertainty.