The Indian economy exhibited considerable underlying strength in 1997-98, but the environment is weakening in response to external and internal developments, intensifying the need for further reforms. Sustaining a higher growth rate that will reduce poverty rapidly will depend on three factors: a) substantial reduction of the government deficit through subsidy reduction and tax base broadening, in order to reduce the risk of macroeconomic instability, increase resources for rapid, private sector-led growth and improve equity; b) realignment of government toward basic human development and truly public infrastructure, with greater reliance on the private sector in other areas; and c) broader, deeper, faster deregulation of external and internal markets to encourage efficiency improvements and higher private investment. The report urges that official development assistance is needed to help reducing poverty and provide a stable source of external finance.