A few months ago Raghuram Rajan, the former Governor of the Reserve Bank of India, said that India was getting back to the ‘Hindu’ rate of growth of less than 5 per cent. We can agree with him or not depending on which political party we support. But I think he framed the issue wrongly.

The real issue for India is whether in the coming two or three decades India should manage demand or augment supply. The two are not mutually exclusive, of course. So the choice is one of degree: which should it emphasise and how vigorously.

There are many reasons why this policy choice will present itself, not the least of which is sustainability both in terms of output levels but also the environment. Even with cleaner technologies and higher productivity of both labour and capital, the per capita issue will remain.

Simply put, we will have as many consumers as Europe, the Americas, Australasia and Africa put together, around 1.6 billion. This is where the demand management question arises because per capita levels of consumption in India can’t be what they are in, say, even Bangladesh. It simply won’t be sustainable, both in terms of the environment and the output levels needed. The latter is mind boggling.

In other words, supply augmentation will have to come at the cost of the environment and with a massive call on physical, human and financial resources that will not, and cannot, operate in sync. In economic jargon, the markets for these will always be in different degrees of disequilibrium. Keeping them at lower levels of disequilibrium will necessarily involve demand management.

How to manage this is the main policy challenge.

We’ve been here before

Except for the environmental sustainability problem, we have faced this disequilibrium problem in the past too. That’s why from 1955 to 1992, the main policy objective was to manage the demand for industrial products via a variety of instruments like industrial licensing, credit rationing and import controls. It was only in the early 1999s that the emphasis shifted to supply augmentation.

There was, however, an exception to this policy approach: agriculture. For a variety of political, economic and personal ego reasons, around 1966 the Indira Gandhi government unequivocally chose supply augmentation of agricultural products. The Green Revolution, comprising more fertiliser use and, therefore, more irrigation was the result.

Over the decade of the 1970s this response led to increasing turbulence in the markets for commodities, labour and finance. The government had only very blunt and bureaucratic demand management tools at its disposal.

Overall, to cut a tediously long story short, a vast expansion of the black economy happened because individuals and firms resorted to hedging strategies against both the markets and the government, which had become unpredictable. It was the double whammy problem.

I think this is where we are now once again. There is turbulence in the markets, there is unpredictability of government policies and, as a result, of the two, disruptive hedging by individuals and firms. Globalisation, of course, has added another dimension to it all.

This is why the government needs to carefully think through the mix of its future approach. It has the next six months to do so. Fortunately the economic ministries are not very busy and can pay some attention to making a presentation to the Cabinet next April. A lot of judgment in scenario building would be involved in the exercise.

The threshold problem

The toughest judgement call would be to get a fix on what the threshold of tolerance is. It is, if you like, similar to getting the aggregate demand and supply curves to intersect at the lowest equilibrium rather than somewhere higher up. In the economics of pricing this is called ‘what the traffic will bear’.

One simple option is to assume that the current situation with GDP growth rate at 6-7 per is fine because it’s not causing any upheavals. But problems could arise if we get too ambitious and start pushing for 8 or more per cent. Equally, we will have to be very vigilant that the real growth rate doesn’t go down very much below 5 per cent.

In colloquial terms, as the Americans say, we are caught between a rock and hard place. Managing this will require a lot of short, middle and long term deftness of policy.

We do well with the short-term problems and passably well with the medium-term ones. It’s the long term — say beyond five years — on which we don’t have a firm grip.

That’s why someone in the government needs to bring some brains together to come up with possible policy options. It will not be easy but it’s important. It’s also the only way to avoid knee-jerk and fire-fighting approaches.