"Pakistan does not need retrogressive thinking, but a tolerant, progressive, moderate, enlightened, dedicated and honest leadership and philosophy as envisioned by its founders, the Quaid-e-Azam and Allama Iqbal," he added.
He said Pakistan has to confront terrorism, religious extremism and sectarian violence and the nation, especially the youth, who constitute 25 percent of the population, must reject proponents of retrogressive thinking.
"Pakistan undoubtedly is an ideological state and an Islamic republic; where overwhelming majority is Muslim, but where minorities also enjoy full rights," had added.
The President said Pakistan, a country of 150 million hardworking people, possesses immense potential and talent with vast resources, is capable of moving forward as one of the leading members of the world community but our leadership failed to deliver and guide the nation in the past.
"It's the endeavour of this government to take the country to new heights with a dignified place in the comity of nations," he emphasised.
He said: "Economically and militarily strong Pakistan has a vital role to play in the given international environment," and added we were not living in a vacuum, as in this inter-dependent world, no country could progress without interacting with other members of the international community.
President Musharraf said: "Our policies are in accordance with the national interest without compromising on the dignity and honour of the country. However, with changing environments, policies are also changed for the betterment of the nation."
With 8.4 percent growth rate, the second highest in Asia, benefits of economic achievements are being passed on to the people, though, his only apprehensions are about extremist tendencies in a minor segment of the society, he added.
The President said he would personally oversee projects aimed at provision of water and electricity to the entire populace by the year 2007."
"Our focus is to materialise basic health and education facilities at the grassroots level, step up economic development and reduce poverty through employment generation and to create conducive conditions for the younger generation so that they may lead Pakistan to progress, befitting its enormous natural resources and human capital."
On his vision of enlightened moderation, the President said it offers a way forward for the world out of its present turmoil and underlined the importance of addressing longstanding disputes affecting the Muslims like Palestine and Kashmir with justice.
Quoting the Quaid-e-Azam's famous speech to the Constituent Assembly, the President said Islam teaches religious tolerance and clearly lays down principles for a balanced way of life, duties to family and the society.
President Musharraf regretted that madrassahs have confined themselves to religious education alone and recalled that about five centuries back, religious institutions served as a seat of learning in diverse subjects, including disciplines of science.
Speaking about some other national issues, the President said the new National Finance Commission (NFC) award will be judicious and fair and bring billions of rupees to provinces for their development, as the government was committed to fostering inter-provincial harmony.
Expressing support for more provincial autonomy, he said, "provinces have reposed confidence in me and I would declare the NFC award keeping in view all considerations."
He said small provinces would be given their due share and the government would bring underdeveloped areas at par with mainstream developed areas of the country.
In his wide-ranging address, the President also underlined the vital significance of water reservoirs for Pakistan for sustained industrial and agricultural development.
"Water is lifeline for Pakistan, which has six rivers but millions of acre feet of precious water is wasted into the ocean due to absence of enough reservoirs in the country.