The slowdown that the Indian economy is heading for requires an urgent policy response.
This has to go beyond the moves already taken to ease liquidity, as they by themselves may not produce the required revival if the economy gets caught in a Keynesian liquidity trap.
There is a need to do more to revive confidence, so that businesses feel emboldened to scale up operations with reviving demand and, over time, begin to relook at shelved investment plans.
Right now, they are setting aside their investment plans; steel and auto units are even declaring brief holidays. In this situation, with inflation appearing to be under control and declining, the Prime Minister's suggestion that the government should go in for the radical option of sharply raising its spending on infrastructure has considerable merit - provided it is able to cut back on the deficits incurred on the oil and fertiliser subsidies.
Such focused pump-priming, rather than generalised pay-outs involving substantial leakage of money, is what is required during a downturn. Those worrying about fiscal discipline should look at the global trend of escalating budget deficits, and the growing acceptance of the need for pump-priming.
India of course has been priming the pump through large subsidy payments, but the need today is for infrastructure spending as counter-cyclical fiscal support, as India has a massive infrastructure gap which tells on growth in the best of times.
Thus, not only would such expenditure be timely, it would lay the foundations of sustained growth in the future. Infrastructure deficiencies need to be addressed across sectors. The country needs more investment in roads, to improve rural connectivity and create fast-traffic highways.
The rural roads programme, already under way, can be enhanced as it is plays a key role in providing market access to farmers. National highways need to be extended as they currently constitute only 2 per cent of the national road network.
As much as 38 per cent of highways are still single-lane. The railways are also in need of expansion and modernisation as the existing network is saturated, with freight moving at a pathetic average speed of 22 km per hour.
The same is the story with ports, which have achieved productivity improvements and now need investment in fresh capacity. As for power, the peak-hour deficit is as high as 13.8 per cent, and transmission and distribution losses are at an unacceptable 40 per cent.
To tackle all this, the eleventh five-year Plan envisages a doubling of investment in the infrastructure, when business as usual is likely to yield only 70 per cent of what is proposed.
Critically, a good third of the money is expected to come from the private sector. To attract such investment, a sizeable part of which can be foreign, and also to ensure that state funding is properly used, it is necessary to improve the quality of governance.
Private funding has to mostly come through the public-private partnership route with, where needed, state funding to fill the gap in capital cost.
While the Indian PPP experience has achieved some benchmarks, it is necessary to further standardise procedures and documentation so as to reduce transaction costs. There is also a need to innovate.
A beginning has been made with the Hyderabad metro rail project where a well conceived, pre-approved concession agreement and specifications have produced a winning bid that eliminates the capital grant.
But governance remains woefully inadequate at the National Highway Authority of India. Spending for the right reason and spending well will both legitimise and enable the action.