The recovery which began in the 1980s reflected a breakthrough, inasmuch as the government was able to sustain a high rate of growth of spending in general and investment-spending in particular, without triggering inflation or setting off a collapse in foreign exchange reserves. The principal explanation for this breakthrough was a change in India's (and other developing countries') ability to access foreign exchange from the international system in the form of debt, direct investment, and portfolio flows. This change was a result in a range of developments in the world of international finance in the wake of the oil shocks of the 1970s, which not only rendered the world financial system awash with liquidity, but also forced it to find new destinations to recycle its surpluses. The resulting access to foreign exchange not only helped India sustain a higher current account deficit, but also allowed it to import commodities in short supply to dampen inflationary trends.
 
Not surprisingly, in the 1980s the rate of investment in India was raised in part by large deficit-financed spending by the government, which not only propped up public capital expenditures but also spurred private investment. This, however, did not result in inflation or balance of payments difficulties because of the access to international liquidity provided by changes in the world of international finance, which allowed the government to borrow abroad to finance its expenditures and to import the commodities needed to meet domestic demand and dampen price increases. Thus the transition to a "higher" rate of growth was not the result of changes within the country, but changes in the world economy, that permitted a strategy that raised growth at the expense of increased external vulnerability as the 1991 balance of payments crisis forcefully demonstrated.
 
To an extent a similar process operated during the early and mid-1990s. Despite the government's claim of having substantially reduced the fiscal deficit, it is known that after making adjustments for changes in definition and upward revisions of GDP figures, the deficit has ruled high over much of the decade. This helped sustain the "growth gains registered during the 1990s, despite the crisis in 1991. It is only in recent years that the deficit has been reduced, with the hope that private investment would help spur growth. In practice the reduction in expenditures that deficit control during the late 1990s entailed has adversely affected investment and growth.
 
The reduction in the deficit has been all the more damaging from the point of view of the dampening of the fiscal stimulus, because of the fall in the tax-GDP ratio. That fall was because of the sharp liberalisation-induced reduction in customs duty collections, in the wake of substantial cuts in import tariff rates. It was also due to the massive reduction in direct and indirect tax revenues as a result of tax concessions provided to the private sector, as part of an effort to spur private investment. With private investment and growth slipping now, revenue collections have dipped even further, as evident from the figures for 2000-2001 and the first month of fiscal 2001-2002.
 
It is in response to this evidence that the government is attempting to shore up expenditures in general and capital expenditures in particular. But even here, the pressure to prove to international financial capital that the deficit is being reined in, is forcing the government to rely on current revenues and surpluses grabbed from PSUs to achieve its goal. It is unlikely that this would have much effect, since there is a limit to such "expansionism". What the government needs to do is to give up its obsession with the fiscal deficit and use the opportunity offered by the large food stocks and foreign exchange reserves available with it, to launch a massive food-for-work programme geared to building rural infrastructure, as well as undertake larger infrastructural investments that would improve utilisation in the demand-starved public sector. This would raise demand and output, increase employment and have salutary effects on poverty and productivity.
 
Though success is guaranteed if such an effort is initiated soon, it is unlikely that the government would opt for this strategy. To do so would be to disturb the tenuous equilibrium it has built vis-à-vis foreign finance capital, the IMF and the World Bank, as well as to openly declare that "reform" has failed to deliver because it is inherently flawed. That would prove the correctness of those who have held that reform of a different kind, involving a significant, though redefined, role for the State combined with structural changes that redress the deep inequities characteristic of "market-driven" development "strategies" in the current international conjuncture, is the need of the hour. India's elite, which the present State represents, is as yet unwilling to back that position even implicitly.