Consequently the government will need to increase its international borrowings. This is something that countries in Latin America are very familiar with — infrastructure investments by the government backed by large-scale international borrowings. This is not really a problem if the scales are limited. But if we want to “pump-prime”, then scales cannot be low. Large-scale international borrowings will be a natural outcome of pump-priming.

The third danger is related to timeliness. Infrastructure build-up takes many years, the gestation periods are high, and it is not clear how the downturn would be affected during the intervening period. Typically an infrastructure project takes one to two years to plan and two-four years to set up (the experts will say these are optimistic numbers); but during that period the regular business cycle would have run its course internationally.

In other words, “pump-priming” would require international borrowings, greater role of the public sector, and will yield fruits quite a few years from now.

Pump-priming is a bad idea. This is a typical World Bank and IMF solution and taken directly from discredited Keynesian texts (as the PM himself mentioned). But international institutions will love this idea, as it will once again allow them to affect India’s reform process. And the centre-left politicians will love this idea as that calls for increased government expenditures and meddling in the markets.

There is a consensus within and outside India on our long term potential, and within this envelope of opportunity and optimism is a short term crisis. No one can deny that there is a crisis. No one can also deny that infrastructure is required. But infrastructure investment is the wrong solution to this crisis. Trying to fit the two together will not benefit us, and may only harm. The solution to this crisis of confidence is somewhere else.

... contd.