The Confederation of Indian Industry has forecast a healthy GDP growth of 6.6 to 7 per cent for 2004-05, driven largely by the manufacturing and services sectors.

In its 'State of the Economy' report, CII says the upswing in the manufacturing and services sectors will continue and accelerate over the next few quarters, as domestic and external demand are strengthened.

The report also notes that companies are preparing to meet the rising demand by expanding their capacity, modernising the technology and focussing on their marketing strategy.

In the services sector, CII expects a sharp increase in growth as rising incomes in rural and urban economies support greater spending on services -- ranging from transport and communications to banking.

According to aggregate data on corporate performance analysed by CII, the manufacturing sector has maintained its healthy growth trend over the fourth quarter of 2003-04. For a sample of 222 companies in the manufacturing sector, sales grew at 17.7 per cent in 2003-04, while net profits grew at 30.4 per cent.

For a sample of 84 companies in the services sector, the growth rates were even stronger at 38.7 per cent and 39.7 per cent.

Strong growth in revenues, together with a sharp reduction in interest costs, has boosted the profitability of companies.

However, the report says a prediction on the agriculture sector's performance will be difficult. While agricultural growth will be lower compared with last year's double-digit growth, it will not be difficult for agricultural output to grow by a few percentage points.

CII estimates the farm sector to remain stagnant or, in the case of a good monsoon as indicated by the Indian Meteorological Department, to grow just two per cent. CII expects industry to grow at seven per cent and services 9.2 per cent. The CII report points out that the sharp appreciation of the rupee can have an impact on the competitiveness of Indian exports.

The appreciation of the rupee against the dollar has been one of the sharpest, compared with several Southeast Asian countries. The rupee has also appreciated significantly in real terms. The average value of the rupee exchange rate has been rising every year, compared with its average value over the ten-year period from 1990-91 to 1999-00.

However, the recent decline in the rupee's value has come as a relief to domestic manufacturers. With the dollar changing direction to appreciate against major currencies in international markets, CII expects less pressure on the rupee to appreciate in the near term.