The fact that the Indian economy has slowed down during 2008-09, particularly from the third quarter, is by now not in doubt. What is in question is the magnitude of deceleration and the timing of revival.

There are several forecasts - some are backed by models and others are based on the best judgements of learned scholars. Frankly, it does not matter because even in the case of those backed by models, the assumptions and number of exogenous variables in them virtually make them the best judgement forecasts.

The EAC to the Prime Minister expects the economy to grow at 7.1 per cent in the current fiscal and expects it to revive in the second quarter of 2009-10. The RBI expects the economy to grow at 7 per cent.

Indeed the quantum and speed with which the economy will revive will depend upon how effectively the stimulus packages will work and what additional measures will the government and RBI implement.

The central government and RBI have acted swiftly to manage the liquidity crunch, though the business confidence is still at a low level. Surely, the impact of the recession in OECD countries on the Indian economy is much more than what was initially assessed, and the percolation of the financial sector crisis to the real sector is much faster and deeper.

The quarterly review of monetary policy details the various steps taken by the central bank to shore up liquidity. It also declares its readiness to act swiftly with additional measures as and when the situation demands.

Although there was widespread expectation on a further rate cut when the credit policy was announced, the central bank preferred to wait for the measures taken so far to percolate and keep the options open to intervene when needed. In any case, there is a 12-18 month lag for the monetary policy to impact and the RBI preferred to wait for its measures to percolate.

Unfortunately, the government is faced with significant constraints in calibrating the stimulus. The first, as is abundantly clear now, is that there is hardly any additional fiscal space for further stimulus. With an estimated consolidated fiscal deficit hovering around 10 per cent of GDP and with an additional 3 per cent of GDP off-budget liabilities, further government borrowing without increasing the interest rate on private sector lending is impossible.

Therefore, the strategy should be to induce the private sector to make investments and this requires a different set of policy measures. Second, once the elections are announced, with the code of conduct coming into force, taking further initiatives will be difficult.

However, at both the central and state levels, the spending departments can prioritise their approved spending allocations and implement the projects on a fast pace. There have been serious laxities as well as lapses in implementation, be it in national highways or allocation of coal for power generation.

Poor governance has been a bane and an equally important cause of economic slowdown. Sadly, there is no accountability and those with monopoly power continue to suck the economy with impunity.

The states too will have to gear up to prioritise and implement their projects on a fast pace. With states having committed an additional half per cent of GSDP (Gross State Domestic Product) as part of the last stimulus package and as they gear up to implement pay revisions, they too can be expected to follow a counter-cyclical stance.

There have been demands to provide additional stimulus to sectors presumed to be the most adversely affected, particularly construction and exports. Surely 'the child that cries louder gets more milk,' and considering the high-profile nature of builders and their close links with politicians, the demand for a bail-out has become louder by the day.

Some builders have even demanded that the government should buy the flats under construction and sell them later to bail them out. Most of the realty firms have highly-leveraged balance sheets with an overwhelming proportion of short-term debt.

The largest real estate company, DLF, probably has the best net debt-equity ratio at 0.6. The ratio for Unitech, the second largest realtor, is the worst at 2.1, closely followed by Sobha Developers [Get Quote] (1.8).

With all the talk about the crash in house prices, much of the southward movement is more illusory than real.  Indeed, there has been a contraction in demand, particularly for houses in the luxury segment because of the falling incomes of employees in the new economy, but the downward inflexibility of prices has prevented the adjustment between supply and demand.

Ironically, between 2001 and 2007, NHB Residex, the only available housing price index, has shown an increase of 2.5 to 3 times in every major city and the annual average increase was more than 20 per cent. The prices of luxury houses must have increased even faster and every realty firm gained. Now that things are becoming a bit rough, they want a bail-out!

The government has eased liquidity, but the demand is for more. The last stimulus provided them access to external commercial borrowings, but to actually get the funds will take time. The banking system naturally has been cautious because it does not want a sub-prime housing crisis here. SBI [Get Quote] has reduced the interest rate to 8 per cent and others will follow.

But interest rates alone cannot revive the market and price adjustment for the relevant segment is necessary. The RBI decision to allow restructuring of commercial loans till June 2009 has, for the present, kept the NPAs of commercial banks at 1.2 per cent of their net demand and time liabilities, but their continued resistance to reduce prices may increase the NPAs. Bailing out the builders through large concessional lending will only prevent the price adjustment and prolong the slowdown.

The time is opportune for realty firms to adjust the prices of the luxury homes segment and switch over to building affordable houses. Indeed, in large cities like Mumbai and Delhi, the government could initiate a programme of providing two-room tenements to slum dwellers in multi-storeyed buildings in the suburbs, and that could free substantially valuable urban land.

In Mumbai, in particular, large tracts of land around the airport not only have been a binding constraint in the redevelopment of the airport, but also are a major security risk. The question is, will the realities of vote-bank politics allow this in an election year?

The author is Director, NIPFP.