NEW DELHI -- The performance of the Indian economy during the current fiscal year has exceeded expectations. Initial growth projections for the period April 2004 to March 2005 were around 6.8%. Expectations were pared by a percentage point due to low rainfall from July 2004. Global price shocks in oil, steel and coal added to apprehension, particularly about inflation. However, shaking off these fears, the economy has grown by a robust 6.9%.

There is growing acceptance of India as a successful high-growth story. Growth has steadily accelerated from 1980 onwards. And this has been achieved simultaneously with nearly 60 years of faithful adherence to democratic norms and traditions. The enshrining of democratic principles in a newly independent country might have involved some initial "fixed costs." But democracy is the only legitimate and stable foundation for a society. India, having paid those "fixed costs," now appears to be reaping the dividends.

There are two aspects to the "emergence of India." First, there are signs of vigorous growth in manufacturing. High growth rates in exports have been extended beyond the now-familiar services story to skill-intensive sectors like automobiles and drugs. Manufacturing growth accelerated every month after May 2004 to reach double-digit levels in September and October. Merchandise export growth in the first 10 months of 2004-05 was 25.6%. For three quarters running, revenue growth in the corporate sector has been above 20% and net profit growth has been around 30%. Second, there is a pronounced pickup in investment. From 2001-02, the investment rate in India, low by East Asian standards, rose by 3.7 percentage points to 26.3% of GDP in 2003-04. There are signs of an investment boom in the high growth in production and imports of capital goods in late 2004.

In May 2004, elections brought the United Progressive Alliance (UPA) into power. In Parliament on Feb. 28, in my budget speech for 2005-06, I emphasized how growth, stability and equity are mutually reinforcing objectives. The quest of the UPA Government is to eliminate poverty by giving every citizen an opportunity to be educated, to learn a skill, and to be gainfully employed. The economic strategy of the UPA is composed of four main elements: maintaining macroeconomic balances; improving the incentives operating upon firms; enhancing physical infrastructure; and a range of initiatives aimed at empowering millions of poor households to participate in the growing prosperity.

The two big elements of the macroeconomic balance are the fiscal deficit and the balance of payments. We are committed to eliminating the federal revenue deficit -- the excess of current expenditure over current revenues -- by 2008-09, as mandated by our fiscal responsibility law. It is currently 2.7% of GDP. The federal fiscal deficit -- which is required to be reduced to 3% by 2008-09 -- is currently 4.3% of GDP.

A special feature of the current year has been a change in intergovernmental fiscal devolution, between the federal and state governments. The Indian Constitution uses a neutral and expert Finance Commission, every five years, to govern this relationship. The latest Finance Commission report places a large burden upon federal finances, amounting to 260 billion rupees ($6 billion) or 0.75% of GDP in 2005-06. As a consequence, we have been constrained to press the "pause" button on fiscal consolidation for 2005-06 only.

There has been considerable international focus on global imbalances in the intercountry balance of payments. India now has over a decade of experience of conducting macropolicy in a setting where foreign portfolio investors have full convertibility, and the exchange rate is determined in the currency market. Having moved from a command and control system for macromanagement, India may have an edge in terms of macroeconomic stability and policy flexibility through exchange rates and interest rates. Currency flexibility has risen in the past year.

A major theme of India's economic strategy is that of creating sound incentives for firms. This is primarily about competition: We are steadily isolating barriers to competition and removing them. India once had a peak customs rate of 300%. In the recent budget, the peak rate has come down to 15%. Another element of this is heightened competition through foreign direct investment. India has limits on foreign ownership in a few sectors, and we have steadily made progress on raising these limits. India had earmarked certain items which only small firms are allowed to produce. We have steadily made progress on shortening this list. The budget this week removed 108 items from this list.

We look to the financial markets to enhance management accountability, and allocate scarce capital to the best and the brightest. We have made considerable progress in building a modern financial sector. Securities are prominent in financing our firms, unlike the bank domination seen in many developing countries. The efficiency of our financial system is visible in India's higher "bang for the buck," converting investment rates that are modest by Asian standards into respectable GDP growth. Measured by the number of trades, our two premier exchanges, the National Stock Exchange of India and the Bombay Stock Exchange, rank third and fifth in the world. This year, we propose to embark on policy initiatives in the corporate bond market and securitization.

A major ongoing structural reform is the move to a defined-contribution pension system with fully funded individual accounts. The transition to this new system, after a bipartisan process of discussion and policy analysis from 1997, has been fairly smooth. A specialized regulator has been set up for the new pension system. We will attempt institutional innovations to contain administrative costs and improve portability of pensions.

It is almost a cliché to describe India as rich in institutional infrastructure and poor in physical infrastructure. As a result, the potential returns to improving physical infrastructure in India are very high. Some results of the concerted efforts at improving transportation and communications in the recent decade are already visible. There are better roads, ports and telecom. The easing of infrastructure bottlenecks has contributed to high exports growth. For example, the synergy between telecom and software is evident. But, there are literally miles to go before we sleep. Further work on roads, railways, ports, airports, telecom and urban infrastructure is a top priority of the UPA Government.

An integral part of our economic strategy is empowering the poor through education and health. Public initiatives on these two fronts -- "education for all" and a midday meal scheme for school children -- will empower millions of young Indians every year to engage in the market process and become partners in prosperity. It is a partnership for participation in two mutually reinforcing ways: through gainful employment on the supply side and through higher consumption on the demand side. These inclusive policies reflect not only the social contract underlying India's democratic success and its vision of development as freedom, but also sound economic principles.

With this economic strategy, we expect exciting times of accelerated growth with stability in the years ahead. The strength of a vibrant democracy lies in the role that reasoned discourse plays in policy formulation. We believe that the evolution of reforms in India reflects such a considered path. There has been a steady acceleration in growth over the last 24 years and a further gain in momentum appears to be underway.

Mr. Chidambaram is finance minister of India.