In September last year we said that growth in 2008-09 would be around 7% and in 2009-10 around 5.5% as the optimistic business as usual scenario. The Deputy Chairman of the Planning Commission is right in saying that a policy scenario can be constructed for 7% growth this year. In fact, a scenario is possible for better outcomes. It is interesting to see what underlies this. We gave our calculations for the last year in public in a longish presentation organised by USAID after the Obama election. Using an earlier Planning Commission simple national accounting framework developed by Jayanta Roy and Manohar Rao three numbers, the decline in foreign investment and export and at best a normal agriculture perfromance gave the upper limit of 7%. Trudging along with slight improvement 5.5% was optimistic for this year. At that time this was pessimistic heresy. When I was speaking in November, the first IMF forecast came in for 6% this year. Now 5% is the standard forecast. What?s new?

The first is the stimulus. It is quite clear that with comparative interest rates where they are required to protect the rupee, a much greater fiscal initiative is unlikely. In fact the demand for consumer goods and food is good. Inflation in consumer goods as measured by the CPI is still around 10%. Industries like textiles are not doing well because the domestic stimulus only takes care of the slackness in exports to an extent, but generally consumer goods are responding. The problem is in capital goods and intermediate industries. Here the stimulus is not working. The decline in foreign investment is fairly sharp. The foreign balance is negative after a long time. This helps the macro managers, since the need of sterilising reserves is not there and in fact gives scope for domestic expansion.

The difficulty is in investment demand. Government of India?s capital expenditure which was at a hundred and eighteen thousand crores in 2007-08 has fallen sharply by 29% to ninety three thousand crores in 2008-09. This is a very sharp fall. It has disastrous consequences for the demand of investment goods. It is also a somewhat shocking aspect of the stimulus policies as actually implemented. Now it is true that a very crude kind of Keynesianism?not the kind found in the General Theory?would allow for the proverbial digging and filling up of ditches. But if that is to be discounted then a lot needs to be done to revive government?s investment spending.

A part of the problem is the crunch in federal financing. As the Eleventh Plan says?and we have said this in these columns earlier?and in IRMA?s State of Panchayati Raj Report with data, the collapse of rule based assistance to the states by the ill advised implementation of the Twelfth Finance Commission?s recommendation on abolishing rule based devolution of market borrowings in a centrally controlled framework has wrecked the ability of states to invest. Fortunately the experts of the Thirteenth Finance Commission have focused on this as a central problem. But their work will take time to lead to outcomes and time is of the essence in the implementation of the stimulus.

The more general problem behind the collapse of government investment is that we are living as if there is no tomorrow. Unfortunately no ministry is saying so. There was a time when the Finance Ministry and the Planning Commission were very forthright on the state of the economy. The Planning Commission was always bullish on the future in an if/then sense, which is what Montek is doing, but was always severe on the present. It?s reviews are still great reading and the Economic Survey and the Annual Plan were good teaching material, since a honours class in economics is the acid test of credibility. Fortunately the Reserve Bank and the Statistics Commission have kept up the flag. The decline in government investment in a crisis needs to be flagged and reversed at least as soon as the new government gets in position. Every day lost is costly in terms of foregone output and shrinking jobs.

Given all this it seems difficult to build up a scenario in which growth revives more than the base case. That incidentally includes an average performance for agriculture which is the best part of the UPA?s report card. They have put the agrarian economy back on track. A 3% agriculture growth means higher rural growth since non crop agriculture particularly animal husbandry and fish do twice as well. The Amul chief has sent me a message on his Blackberry of twenty eight percent growth last year and I replied Dil Mange More because of the recession. IRMA has placed all its graduates and the number of its applicants is booming. In crisis as in the past, the homely virtues of Bharat rescue India.

?The author is a former Union minister. Email: yalagh@gmail.com