Since December when the Lok Sabha was attacked by Pakistan-supported terrorists, the economy has moved off from the front pages as an area of concern. From time to time we have heard reassuring noises from ministers ('the economy will not be affected by the Gujarat riots'; 'our economy is strong enough to bear the costs of a war'). Chambers of commerce have released optimistic surveys of the level of business confidence in the future and of a pickup in demand for some products. Every small improvement in indicators - tax collections, exports, improvement in prices of industrial products, a rise in non-food bank credit - is hailed as a signal of revival. The fact is that the economy is not in good shape. This is true of all segments. Inflation is at a historic low but that is probably more due to poor demand than to any specific action of the government. Even the rise in fuel and power prices has had no effect on the wholesale price index. Interest rates have come down considerably but banks are awash with liquidity, despite some improvement in non-food credit in recent weeks. Of the major financial institutions, except for ICICI, Power Finance Corporation, National Bank for Agriculture and Rural Development and Infrastructure Development Finance Corporation, the others are in varying degrees of difficulty. The non-performing assets of banks and financial institutions show no sign of falling despite the low levels of industrial lending by them, for some time. This suggests that earlier loans are not being serviced and more of them continue to fall into this category. More borrowers are finding themselves unable to make enough money to service their borrowings. Cumulatively, export growth has decelerated. So has the growth of imports, indicating that the recession is continuing. The rupee has been declining gradually in relation to the dollar, though the dollar has also weakened. In relative terms, the rupee has weakened by even more than its exchange value shows. However foreign exchange reserves continue to rise to incredible levels (for India), due to reasons unknown. In part, the causes could be overseas Indians finding it safer to keep their money in India, the funds influx due to growing takeovers and buybacks by foreign companies, and directions to exporters and holders of euro convertible bonds to bring their funds back to India. But foreign institutional investment is at low levels and foreign direct investment in building new capacities is almost at a standstill. The stock market survives by 'promoter' manipulation, but investors have lost vast amounts of market capitalization. The primary market has been signalled as being about to improve, because of the large number of initial public offers in the offing. But IPOs have in the past let down the investor, with high offer prices sinking to low levels as soon as the offer is completed. The integrity of most issuers and promoters is not high in the minds of investors. Either the new IPOs will fail, or like lemmings, investors will again follow promoters to the sink of collapsing market values. Industrial production has been growing at the lowest rates of the last ten years. Demand recession is spreading and a very large number of businesses are closed, closing or in trouble. Profit margins are badly squeezed for almost all products, many of which are cutting prices or giving away substantial amounts as gifts. Agricultural production is showing growth but stocks of foodgrains have piled up and we have little clue as to what to do with them. The power sector may be reforming, but there are no results yet in most of the country. The service sector shows growth but the figures are difficult to believe. Tourism is down, as is the business in hotels and restaurants, which show declining occupancy and tariffs. The financial sector is in great difficulty with many stock exchanges having closed and even the biggest, the Bombay stock exchange, showing very low business. The advertising industry is facing the biggest recession in its history, and layoffs are rampant. When manufactured products are in decline, retail and wholesale trade could not be faring well, whatever the Central Statistical Organization's figures might show. Information technology continues to show growth though margins are now under pressure. With many small-scale units closing down, large-scale use of voluntary retirement schemes and general slackening in the economy, the employment situation is bad. Neither can the self-employed be as well off as before. The unemployed, the retired, and pensioners must be facing hardship because of the precipitous decline in interest rates on saving instruments. The one bright feature has been the apparent acceleration of the government's disinvestment programme, which will, hopefully, not be derailed by the fracas over the Videsh Sanchar Nigam Limited's proposed investment in a Tata company. Disinvestments are unlikely to make a significant dent in the certain rise in the government's deficit. Productivity is not growing. The economy is obviously in worse shape than it was even a year ago. In this wretched economic scenario, a few enterprises in some sectors have cut costs, improved productivity, aggressively developed the market, and shed flab. Others, including even the bluest chips, had cut quality (like a reputed manufacturer of toilet soaps and ice creams), used gimmicks like share splits to stimulate market price rises, increased consumer prices by more than the drops in volumes, bought back shares at depressed values (many times achieved by artful manipulation), created artificial shortages of their products, and taken other actions at the cost of the consumer, investor and government. It was clear in 1991 when we started liberalizing that the future was bright only for those who gave precedence in employment to competence over contact or chromosomes, established objective staff selection, evaluation and development programmes, invested in research and development and brand-building, focussed on the most promising and core businesses, and generally prepared themselves for intense competition. Those who did not do so, and preferred to continue in their non-competitive but hitherto profitable past ways, would find it difficult to survive. This has started happening to many businesses. Are things getting any better for the economy? There is no good reason to think that they are. The fears of war, the evacuation of foreign nationals, the setback to foreign orders on domestic companies, the squeeze on margins, the fall in foreign investments, the huge extra expenditures by government, the rise in oil prices, have all combined to make the situation even more difficult. On top of these, there is the uncertainty regarding the finance minister, the finance ministry's revolving chair style of staffing, the lack of any action on the inefficient and wasteful food procurement and public distribution system, the lack of progress on public investment programmes except the highways, the declining financial situation of most state governments, to name only a few of the obstacles to the growth of the economy. If the Pakistan strategy was to bleed the Indian economy with active assistance to subversion and terrorism in Jammu and Kashmir, the Northeast, criminal gangs in Mumbai and elsewhere, the Indian government has helped it by its lack of a coordinated and cohesive approach to the problems of the Indian economy, and speedy actions to set them right. We need actions at many levels. Our system of governance gives excessive and profitable discretionary authority to administrators and politicians. A statutory framework of independent regulators must replace most of these shadowy government regulators. Our justice system has to speed up. Not only do we need more courts at all levels, we need the judges to be better remunerated, selected independently, and with enforceable codes of conduct. We must make our farcical election funding rules more realistic. We must make penalties for non-compliance of rules, legislation and regulatory orders much more stringent. We must have a clear, coordinated and comprehensive set of policies on agriculture and food, energy including fuels, healthcare, integrated transport (including waterways), and the many other critical areas of the Indian economy, its physical and social infrastructures. The economy is not going downhill because of factors outside our control. It is down and nowhere near its potential because Central and state governments do not know how to govern the economy. The author is former director general, National Council for Applied Economic Research rao_l@vsnl.net