As the UPA government takes mark for the home run stretch of its second term, policy-makers will be acutely aware of one widely used concept of economic theory: constrained optimisation. It represents arriving at a set of best solutions to an array of problems.
In a real economy, however, the most favourable way out for one set of problems could harm prospects somewhere else. Striking a balance may involve a painfully long process of slow, gingerly taken steps.
There's no gainsaying the fact that the economy needs an overhaul after sputtering over haywire prices, low investment and a precarious fiscal situation. There have been very few periods in India's contemporary history when prices have remained so stubbornly high for such a long period. On the other hand, India's business leaders have been ratcheting up their demand for lower borrowing costs. Parliamentary standstill has also hurt business climate.
Besides, India needs about Rs 62 lakh crore over the next five years to shore up its crumbling, inadequate infrastructure. That will not happen unless an environment is created where investors are not scared of locking up capital in long-gestation projects, such as roads and ports. High subsidies, however, have widened its fiscal deficit limiting its elbow room to spend on investment schemes.
With the Lok Sabha elections just months away, political expediency will demand a fair sprinkling of populism even as industry captains and economists will be keenly watching the pace at which reforms are initiated. Straddling both worlds could involve a delicate tightrope walk. Having said that, there are some evidences that can give reasons to cheer even in these strained times. Inflation, at least vegetable inflation, is showing signs of bottoming out.
Also, a normal monsoon and the consequent rise in rural incomes, it is expected, would push consumption growth. Most importantly, the world, particularly the United States, is stepping out of the deepest recession since World War 2.
The composite leading indicators tracked by the Organisation of Economic Cooperation and Development are also showing stronger signs of recovery in other advanced economies as well.
That's good news as nearly two of every three products that India exports are shipped towards US, Europe and Japan. One thing, however, is certain. The burden of reform expectations on the new government will be too heavy, as also the need for a firm hand on the fiscal situation. The time to walk the talk has come.