Over the last twenty years, GDP growth in India has averaged close to 6 percent. The growth has been consistent – 5.7 percent between 1980-89 and 6.3 percent, 1991-2000. There is a 0.6 percent acceleration, but this is entirely due to the software sector which is adding about 0.7 percent to GDP growth. Even Mr. Mahajan is not claiming credit for the acceleration – yet. And history is likely to show – soon – that the moment the government via Mr. Mahajan landed on the software scene with an Information Technology Ministry (oxymorons are the norm in India) that it was the exact peak in growth of Indian Software Exports (ISE)!

Both the government and the software lobbying firm (NASSCOM) have been indulging in Club of Rome type forecasts of software exports. The average growth of ISE is estimated to be 40 percent over the next five years, and in 2004-5 such exports are expected to reach $ 27 billion; three years later, 50 billion! ISE exports in 1999-2000 were estimated to be close to $ 4 billion. If software exports grow at more realistic 25 percent, ISE in 2004-5 would reach $ 14 billion, or almost half the Information Ministry- NASSCOM-McKinsey forecast! Note the wonder of compounding and the sharp increases (or drops) with seemingly insignificant changes in growth rates.

This trap was exactly where the Club of Rome forecasters fell when they saw "Apocalypse Now", back at the trough of the world economic crisis in the mid-seventies. The software targets for 2004, and especially 2008, are likely to fall the same fate as the Club of Rome - especially since they have used the same methods. Extrapolate like a sophomore, and you will get soporific results!

Bottom line - there is an impending economic crisis in India, triggered by software exports not growing as expected, and thereby implying that the economy will find it difficult to grow at the two-decade old average of 6 percent. Indeed, unless reforms occur, a growth rate close to 5 percent is more likely.

This reality will have an effect on politics. The Indian voter is used to a growth path of 6 percent, and as documented in late August 1999, the voting fortunes of the Congress party have closely followed the path of economic growth. (Incidentally, this model was the only one to forecast a Congress debacle in Sept. 1999 - it forecast 116 seats for the Congress, and they got 114!) There is no model except astrological which will forecast that the Congress, led by the Great White Hope, will ever come to power. But the BJP only has 180 seats, and they can easily be punished for bad economic performance, with a non-BJP non-Congress leader at the helm.

India's economic reform history is replete with instances of politicians responding to crises. Most of the time the response is of the band-aid variety, though in 1991 a partial major surgery was engineered. Since those eventful reforms, the world has changed - we have internet and instantaneous transmission of information. And in this new era, the politicians are likely to respond to an impending crisis.

It is in this regard that reform noises about a Fiscal Responsibility Bill are politically astute - and hugely welcome. In "Clueless in Wonderland", Business-Standard, Dec. 8th 2000, I had pointed out that for about 20 years both the economic growth rate and the consolidated fiscal deficit had stayed constant, the latter around 10 % of GDP. Given two constants, it is impossible to derive any empirical relationship.

What evidence exists that fiscal deficits do matter, or that real interest rates are relevant. This question was examined in detail in "Hayek Rediscovered - The Road to Economic Freedom", June 1999. Data for over 70 developing countries were used for the time- period 1970-1997. The results were striking - both fiscal deficits and the financial repression were hugely significant explanators of growth performance - and much more important than the "traditional" variable, investment.

In this paper, both very high real interest rates and very low real interest rates were considered equally bad. This is a departure from the financial repression literature which only considers negative real rates as bad. The "normal" range for real 1 year deposit rates for all developing countries was observed to be between 0 and 1 percent. Less than 10 percent of country-year observations fall in the 8 % plus real rate that prevails in India. Less than 20 % of observations over 30 years show real deposit rates above 6 percent. Incidentally, there is no country-year when a high real interest rate of 9 percent is observed without that being a year of the crisis or a year removed. In India, high real interest rates have been the norm for the last five years.

The results - Each 1 percent reduction in real deposit rates (towards the norm of 0.5 to 1 percent) would add about 0.4 to 0.75 percent (the effect is non-linear at high real interest rate levels) to GDP growth. Each 1 percent reduction in fiscal deficit adds about 0.25 percent to GDP growth.

Today, almost 90 percent of the fiscal deficit is interest payments! If the government were to simply announce that henceforth savings deposits would yield only 2.5 percentage points above inflation (this will still place India in the top-third of all developing countries making such exorbitant interest payments on deposits), Indian growth is likely to be 2.5 to 3.5 percentage points higher. This policy is easy to implement, there are no losers, and allows the BJP to be in power as far as the eye can see.

The BJP has a clear choice - either be in power, or be booted out within the next year. What bets they will do the right thing ?

Postscript: It is difficult to resist a comment on the end of the US presidential election. This election was the source of a lot of humour, and all of us are grateful. Unfortunately, the election has ended in a tragedy. The US Supreme Court let ideology take precedence over fairness; it even issued a ruling that would make the fourth world proud - stop counting the votes (Saturday) and then announced (Tuesday) that there was no time to count the votes! We now know why the American Superman talked about "Truth, Justice and the American way" more than 60 years ago. Superman saw no redundancy in the trilogy - and neither does the US Supreme Court.