It is that time of the electoral cycle when political parties will draft manifestoes and they will have economic content. It is that time of the business cycle when India is on a downward spiral. The RBI has admitted the growth shock was more than was originally expected. We are on 5.5 per cent, perhaps lower if one takes away the impact of the Pay Commission. Compared to 8.5 per cent, 5.5 per cent is a crisis .

As an empirical proposition, let’s accept that reforms jack up growth and growth is good for the cause of poverty reduction. Outside the Left parties, and those who adjust facts to suit their opinions, no one should contest these statements. After the 1990-91 crisis, it is also true India’s growth revival was faster than in any country that introduced structural reforms. While several factors drove that revival, external sector reforms and industrial de-licensing were key. Other reforms were talked about, but rarely implemented outside the financial sector. Another increase in the growth trajectory was in 2003, driven by a decline in the cost of capital, not to be confused with broader capital market reforms. The external growth engine is now non-existent and won’t recover in a hurry.

Revival of growth has to be internal in source. Studies after the East Asian crisis found the shock was less in parts that weren’t integrated with national and global markets. But that ought not to be an argument against reforms that encourage integration. In India too, despite lacklustre agricultural performance in Q3, what provided a cushion is agricultural growth in irrigated rice and wheat growing areas. Some back-of-the-envelope figures bear mention. Efficient physical infrastructure will add 1.5 per cent to GDP growth, 1 per cent from power alone. Efficient public sector delivery (not just PSU manufacturing) will add 1 per cent to GDP growth. Rural sector reforms will provide increment of 1 per cent. Finally, an efficient legal system (including dispute resolution) will add 1 per cent. This doesn’t mean social infrastructure is unimportant, but I am not aware of any back-of-the-envelope figures for that. China has just approved a huge fiscal package. What’s being debated there is: How will the money be spent? There is no debate about where the money will come from. That’s the Indian problem. There is no elbow room for fiscal expansion.

... contd.