What went wrong? Ask a leftist leader such as the CPI(M)'s young fogey Prakash Karat, and he'll invariably blame Chidambaram for having handed out a tax bonanza all too suddenly. United Front (UF) leaders generally do not join issue with Chidambaram on policy. Unofficially, though, they too complain that he was over-optimistic. Congress Working Committee (CWC) member Manmohan Singh, under whose stewardship the slowdown had actually begun, takes a generally sympathetic view of his successor's performance, but he is severe on the Government's "fiscal permissiveness". Pranab Mukherjee, fellow CWC member and yet another former finance minister, blames it on the Government's "all-round mismanagement". In a CWC resolution adopted last month, the UF Government was accused of containing fiscal deficit by reducing capital expenditure. Both Singh and Mukherjee argue that this would compromise the country's long-term interests.

From the Finance Ministry though, hype springs eternal. Reserve Bank of India (RBI) Governor C. Rangarajan chose a special convocation of the Indian Institute of Management, Ahmedabad, where he was conferred the honorary title of Fellow of the premier institute, to make a morale-boosting forecast of the economy in the second half. Underlying the RBI governor's pep-talk is a distinct possibility that the central bank, while announcing the monetary and credit policy statement for the second half of the fiscal year on October 21, may cut the key "bank rate" -- the rate of interest at which RBI lends to the banking system -- from 10 per cent to 9 or 9.5 per cent. It is meant to be the economy's bellwether rate.

Finance Ministry pundits think a reduction in the cost of capital, coupled with a lowering of the cash reserve ratio (the CRR stipulates the minimum ratio of banks' cash holding to its deposit liability) from the existing 10 per cent, will restart the dynamo of investment. If low interest rates can spur investment, particularly in the sagging capital-goods sector, there will be a consequent drop in consumer goods prices. That may eventually lead to a demand pick-up.

There are, however, too many ifs. The banks are wary of trusting borrowers with credit because of the high load of non-performing assets, that is, loans not repaid after more than two years of due date. V.R. Srinivasan, money market expert with Imperial Finance, says that many are borrowing now "only to repay high-interest loans taken in the past". So the new credit flows may have an accent on cost-cutting rather than growth.

Besides, there is a question mark on whether monetary levers alone can jack up investment. There is no guarantee that a drop in interest per se can lift investment. The correlation between interest rate and investment -- high interest rate being a disincentive for investment and vice versa -- is an unresolved debate in economics. In 1996-97, the best lending rate had dropped to 14.5 per cent from 16.5 per cent in the previous year. But the index of industrial production began to plummet at the same time.

Some private sector firms are, however, still hopeful. Uday Kotak of Kotak Mahindra Financial Services expects an increased pressure on the rupee to be the trigger for revival. The hope is built on an uncertain foundation. Thanks to a large foreign exchange reserve (US $30 billion) and a low current-account deficit, the rupee seems to be stable for the time being. Even if it falls, there may not be a proportionate export growth for other reasons. Such as congestion in ports, bad roads and increasing competition from Southeast Asia where most currencies have recently been devalued. At the moment, cynics outnumber optimists. P.K. Mittal of the Ispat Group says: "It would take another year or more for a turnaround. No new projects are coming up." Echoes Rajiv Chandrashekhar, chairman and managing director of BPL Telecom: "Logically, an economy can't be down in one year and up the next. The biggest hurdles to growth -- political instability and infrastructural problems -- persist. These can negate any prospect of growth."

The present economic slowdown is at least partly attributable to the profligacy of the state, though the Government's newly inflated wage and subsidy bills are yet to have an impact on prices. Its effect, in conjunction with that of increased freight rates of both rail and road transport, may take the inflation rate back again from the current low level of below 4 per cent to around 7 per cent in April. A higher inflation rate cannot but reverse the RBI's strategy of pulling the interest rates down. Thus, even a moderate rally in demand and investment in the third quarter -- if it at all takes place -- will come to an end in the last quarter. The Government can, of course, try its hand at pump-priming the economy by greatly expanding expenditure on the capital account. That is a time-honoured Keynesian solution for overcoming recessionary trends. However, with a professed obligation to keep fiscal deficit under control, there is not much elbow room the Government can obtain for public expenditure.

But there are other factors too that lie beyond the reach of fiscal management. After signing the World Trade Organisation agreement, India is in an open trade regime in which the rise in prices of virtually all items (except consumer goods) is constrained by international trade norms. Take steel for example, the duty on which has come down to 25 per cent from 50 per cent three years ago. It is therefore no longer possible for tisco or sail to sell it at more than a quarter above the international price. If they try to, the market will be swamped by foreign rivals. Even the 25 per cent margin will vanish if the exporting country devalues its currency.

NCAER chief Rakesh Mohan says many investment decisions are getting postponed as investors are unable to set an economic price on their product "for fear of global competition". Mohan attributes the current low rate of inflation partly to increased globalisation of trade, which has put every economy today into a battleground for improving products and processes.

That brings us back to the question of productivity. Inextricably tied to a productivity rise is the question of reform. In the first leg of economic reform (1991-93), the Congress government led by P.V. Narasimha Rao could substantially liberalise policies of industrial licensing, trade, capital markets and external-sector developments. That led to not only a higher gdp growth but a substantial increase in productivity.

Six years down the road, the urge to change the paradigm has been dissipated. Labour-sector reform, which hinges on an efficient exit policy, has been virtually suspended following strong resistance from political parties of all hues. The result: 1,975 sick companies, with losses exceeding Rs 23,700 crore, awaiting the healing touch of the Board for Industrial and Financial Reconstruction. Halted reform in the energy sector has taken the electricity cost in India to nearly four times that in the US and more than double that in South Korea. The cost of delay in the Indian ports of, say, imported scrap iron is 150 per cent of its shipment cost from Dubai. The efforts to lower such transaction costs in the economy have been stymied by a systematic opposition from the political class to a change in the way public assets are financed and used.

Economist Suresh Tendulkar says the pent up demand is "flattening out" as the real issues -- infrastructure bottlenecks, social sector and administrative reforms -- are not addressed. Reform has a broad outer gate and a narrow inner gate. India has passed through the outer gate but is stuck at the inner gate, where entry is blocked by those who may be hurt by further reform.

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