India could become one of the fastest growing countries among the emerging market economies with its expected growth rate in 2003-04 next only to China, even as Reserve Bank of India said the downward bias on inflation front may not be attainable.

"The growth rates experienced by India in the recent period have been among the highest in EMEs. Notwithstanding the general recovery worldwide, there is a possibility that India may emerge as one of the fastest growing countries among the EMEs as the expected growth rate during FY-04 is next only to China," RBI said in the "Report on Currency and Finance" released in Mumbai on Wednesday.

The rebound in agriculture witnessed in the first quarter of FY-04 accelerated sharply in second quarter, aided by a salubrious spatial distribution of rainfall and the best monsoon in a decade, culminating into an impressive growth of 8.4 per cent, it added.

The composition of GDP was changing and the conventional economic development paradigm was evident in a declining trend in the share of agricultural sector and an upward drift in the share of industry and the services sector.

"A matter of concern, however, is that the shift to industry has slowed down in the 1990s, unlike in other countries," it added.

RBI has revised the GDP growth for 2003-04 to around seven per cent with a continued upward bias.

The RBI report said the experience suggests that sustained excessive monetary expansion has often spilled over into inflation.

Increase in prices of domestic mineral oil, electricity, fruits, oil seeds and textiles pushed inflation up to 6.1 per cent by January 3, 2004.

"While the increase in foreign exchange reserves reflects the growing investor confidence in the Indian economy and provides an insurance cover against adverse external shocks, there is also the need to mitigate the inflationary potential by counter-balancing the domestic and external sources of monetisation," it said.

The future growth strategy would also need to be more labour absorbing to accommodate the projected expansion in the work force. Reforms in labour market, educational system, pensions and medical care would gather importance within the overall intensification of structural reforms so that an average current account deficit of 1.6 per cent of GDP during the Tenth Plan period could be realised.

In order to reap the fruits of opening up, enabling conditions need to be created by providing a proper incentive structure to encourage private investment in agriculture and infrastructure.