Dangerous times breed dangerous ideas. Especially among those who have run out of ideas. I am afraid that the Central Government finds itself in such a situation.After months of posturing, the Government has been made to eat crow. As I have pointed out many times, 1996-97 was a year of high growth (in fact, the highest in the reform years) but 1997-98 was a difficult year. The cause was the Asian crisis. GDP growth dipped to 5 per cent (since revised to 4.8 per cent) but even that seemed quite an achievement when economies around India and their currencies were collapsing like a house of cards.

When the BJP-led Government took over, there were ample foreign-exchange reserves, adequate stocks of foodgrains and low inflation. Even if the Government had done nothing, year-on-year growth in 1998-99 would have been quite creditable. That is precisely what happened and 1998-99 recorded a GDP growth of 6.8 per cent. Since then, however, economic growth has been going one way-downhill. Finance Minister Yashwant Sinha tried swadeshi, tried privatisation, tried fixing excise duty rates, tried pump-priming, but nothing seems to have worked. 1999-2000 recorded a growth rate of 6.1 per cent and 2000-1 only 4.0 per cent.

This is when the dangerous ideas come in. The first big idea was pump-priming or jump-starting the economy with larger government expenditure. No one seems to have paused to ask what the government will spend on? There is no other sector except the roads that has the capacity to absorb large doses of government expenditure. For example, huge sums were set apart under the Accelerated Irrigation Benefit Programme to complete the last mile in unfinished irrigation projects. Yet, in every year there was a shortfall in utilisation. NABARD monies were made available for the Rural Infrastructure Development Fund, yet many states found it difficult to spend their allocations. Government spending requires plans, estimates, approvals, sanctions, etc., not to speak of audits. A sudden surge in spending is just not possible.

One may think defence can absorb large sums of money and spend them quickly. Wrong. Defence purchases are usually spread over two to three years. Besides, these purchases are made abroad and do little to kickstart the domestic economy.

Thankfully, the Government abandoned the idea of pump priming. The real reason was that it had no money and was in no position to borrow more without impacting interest rates. Revenue collections were short of target, non-plan expenditure was running ahead of the budget estimate, the fiscal gap was already high and there was no way a finance minister, with a modicum of fiscal responsibility, could sanction a bigger government expenditure.

Now comes the next dangerous idea. The RBI has put out the hypothesis that there is something called growth-enhancing inflation and that the current low inflation is depressing economic growth. Inflation does give an illusion of growth. Suppose a company's sales were Rs 100 last year; suppose its sales grew by 5 per cent. Its sales this year will be Rs 105. Now suppose inflation was 5 per cent, the company will report sales of Rs 110. There is an illusion that its sales grew by 10 per cent while the truth is that, at constant prices, sales grew only by 5 per cent. In the pre-reform years, finance ministers gleefully reported revenue growth in double digits, conveniently omitting to say that inflation was 8-10 per cent.

When India embarked on the path of reforms one of the disciplines accepted was that inflation must be brought down. Price stability was accepted as a governing ethic and the larger degree of autonomy given to the RBI was with the object of maintaining price stability. In most nations of the world, alarm bells will ring if the annual rate of inflation crosses 2 per cent. For too long, Indians were conned into believing that 6 per cent growth and 6 per cent inflation was an acceptable formula-except that the economy never registered a decadal growth rate of 6 per cent until after 1991.

Inflation is an indirect tax and hurts the poor the most. Inflation erodes savings. Inflation keeps interest rate high. If there was anything growth-enhancing about inflation, many developed countries would have happily embraced it and made it part of their economic philosophy.

True, some inflation is tolerable when the economy grows at a clipping pace. But when the economy is in the doldrums, to suggest that inflation will enhance growth is both cynical and callous.

I sincerely hope that my friend Yashwant Sinha will turn a deaf ear to these dangerous ideas and try time-tested prescriptions like lowering interest rates, boosting investment, capital market reforms, reducing government spending and enhancing productivity in key sectors.

(The author is a former Indian finance minister.)