The prime minister is a man of energy and ambition. After having been ruled by a prime minister of infinite caution, it is quite a change to have a prime minister who wants to do something, and would like to show off his achievements — which are at the moment in the future. A man of no action has an advantage, that he can make no mistakes. Effective action requires focus and understanding: a man of action must understand what connects ends and means, and gauge correctly what needs to be done. In economics, this means having a good model of cause and effect, and clarity on policies. I want today to analyze the current economic situation, and give some idea of what needs to be done.

The latest available figure of growth of gross domestic product is just about 4 per cent. That is extremely low in the context of our history of the last two decades. Gross domestic expenditure growth is much higher — my estimate is close to 7 per cent — which I find dubious; the two figures should not be so different. What is important, however, is that the fall in growth, which began in 2010 or 2011, has ceased: the growth rate has turned up.

What caused the downturn? The GDE figures show a rapid fall in growth of capital formation, from 15 per cent at the end of 2010 to just 2 per cent in the middle of 2012; it was dribbling around 4 per cent in mid-2014. Export growth shows the same cycle, but a much sharper fall from 25 per cent to zero, and recovery in the latest period to 13 per cent. Consumption growth, on the other hand, declined much less to about 5 per cent, and had recovered to 8 per cent by mid-2014. GDP figures show a fall in manufacturing growth from 11 to 2 per cent. Thus, the boom of 2010 was led by industry, and the subsequent downturn was also led by a decline in manufacturing exports.

A slump in exports should normally lead to a worsening of the balance of payments; for India, which traditionally has run a payments deficit, that would be worrying. Surprisingly, however, the balance of payments strengthened during the downturn: import growth fell much more than export growth. Import growth had topped 23 per cent at the end of 2011; it was negative in mid-2014, and still falling. Thus, the balance of payments is quite sound; the government could adopt expansionary policies without worrying too much about it.

But in 2009, Indian industry was investing almost 2 per cent of GDP abroad; it was also receiving much foreign direct investment. Foreign portfolio investment was flooding into the stock market. Over the next two years, industry’s fortunes declined. It stopped investing abroad, and foreign portfolio investment inflows came down. Financing of the balance of payments posed no problem because Reserve Bank of India kept interest rates up. But financial inflows also dwindled as the state of the economy worsened. In early 2013, India was attracting roughly 7 per cent of GDP in capital inflows; by the middle of 2014, they had come down to just about 2 per cent.

Incidentally, agricultural growth has been unprecedentedly high. It went up to 7 per cent in 2011, and has been close to 6 per cent in recent quarters, after going down to 3 per cent in between. This is far too high: agricultural demand does not grow that fast. Such high growth is bound to end up in agricultural surpluses; and given our country’s stupid policy of buying up at high prices all the wheat and rice that farmers produce, this is the way to build up bigger and bigger foodgrain reserves for which we have no use.

While it is doubtful if the new prime minister watches economic statistics closely, he must have experienced the boom in foreign investment inflows and the consequent decline. This probably led him to conclude that global industry no longer regarded India an attractive investment destination, and to invite it to come and make things in India.

To an economist, it makes no difference where growth comes from: any growth is good as long as it is supported by demand and does not result in unemployed resources. But the prime minister wants growth in manufacturing, and who are we to argue with that? He can pursue whatever objective he likes; I can only point out where and how economics might trip him.

Manufacturing growth will have to be supported by demand: who will buy the increase in production? Historically, this country does not want to spend more than a fifth or sixth of its income on industrial goods. If the prime minister wants industrial production to grow faster, industry will have to find markets abroad, in competition with Japan, China, Germany and the rest.

That is why it was a good idea of Modi to invite foreigners to invest in India: they can find markets abroad. They may do so; but for that, he will have to do a number of things. First, he must make the commerce ministry dismantle its niggling restrictions on employment of foreigners, proportion of foreign equity in Indian companies, etc. Second, he must give an assurance that sudden, arbitrary changes in taxes and in tax treatment, such as Vodafone was subjected to, will cease forever, and he must appoint a finance minister whom foreigners will trust. Third, he must get his government to produce cheap electricity — my preference is for barge-mounted, oil-fired power plants which can be parked in ports and used to supply electricity to those states which give up indiscriminate subsidies and introduce market-determined power pricing. Fourth, he must revive Atal Bihari Vajpayee’s project of highway construction, in order to reduce the cost of road transportation, especially in poorly served northern India. Fifth, he must order construction of a dozen artificial ports of 12-20 feet draft on the east and west coasts, and connect them to the hinterland with good roads and railways.

Finally, his government has stupidly parroted the previous government’s stand in the WTO. India need not worry about food security. It is producing too much food; it neither has to produce more, nor to protect it against imports. On the contrary, it must seek to export agricultural goods; and to do so, it must produce them at internationally competitive costs. It is time to put an end to the decades-old policy of agricultural self-sufficiency. The government should buy just enough grains to deal with the risk of occasional crop failure. For the rest, it must allow free agricultural trade, and align agricultural prices to world prices. That is the way to bring prosperity to farmers — and not just to the fat rice and wheat farmers — and make India an agricultural superpower.

This is just the beginning. Much more can be done to bring riches to India. But for that we first need politicians with vision and understanding. The new prime minister has the first. He still has to show he has the second — or can seek understanding when necessary from those who know more.