NEW DELHI: India’s economy should be the envy of the world. Official statisticians have just announced that it will grow at a blistering 7.4 per cent in the financial year ending March. But New Delhi isn’t breaking out the champagne just yet.

Prime Minister Narendra Modi has a big decision to make later this month - and growth can and will falter if he chooses wrong.

It’s one he’s been ducking for the decade-plus that he’s been in power. Since he was first elected in 2014, Modi’s economic policy has had two pillars: Fiscal restraint and ever-higher infrastructure spending. He may no longer be able to manage both. Which will win?

From the outside, the economy looks like it is in a “Goldilocks phase”, as the commentator TN Ninan has argued: inflation is low, the trade deficit manageable, and private-sector balance sheets are healthy. But, he points out, that doesn’t mean the economy is actually growing any faster than it was a decade ago, when it had far more troubles.

Investors by and large agree. Writing in the Financial Times, Ruchir Sharma points out that India’s “not getting any love” for its world-beating growth - capital isn’t flowing in like it should.

PERSISTENTLY LOW PRIVATE INVESTMENT

There’s an additional, underlying problem here that explains why the numbers look great but its future feels uncertain. And that is that private investment is persistently low.

In fact, Modi has made at least one big structural change to the economy. He shifted the burden of investing for growth from companies to the public sector. The share of federal government capital spending in GDP terms has doubled since 2014.

Alongside that, however, debt has ballooned. The number that defines Modinomics isn’t 7.4 per cent GDP growth. It’s 81 per cent, the current debt-to-GDP ratio. That was in the 60s when the current government took over.

This has had real world consequences. The state gobbles up the available credit, interest rates are higher than they could be, and entrepreneurs don’t think it’s worth getting out of bed.

It’s a self-reinforcing downward spiral. Capital scarcity means private investment is low. The government, as spender of last resort, steps in to keep the economy humming. This makes capital even scarcer. Breaking out of this cycle requires considerable political will.

RUNNING OUT OF MONEY TO BURN

So far, Modi has bet on the opposite: That massive infrastructure projects will “crowd in” private capital. Shiny new ports and highways, however, haven’t been enough to get companies to borrow and invest. Instead, they have created a growth model that is fuelled by government spending. New Delhi is now running out of money to burn.

In a few weeks, the government will present its budget for the next year, in which it will be forced to make a choice. It can maintain the capital-expenditure push, at the risk of missing its fiscal consolidation goals. Or it can trim the construction pipeline, accepting slower medium-term growth in key sectors - including steel and cement - that have become dangerously dependent on public-sector orders.

The economic choice may be clear, but the political one isn’t. The marginal return on a new expressway might be lower than the marginal benefit of a lower risk premium for Indian borrowing. But the electoral return of the first is a lot higher.

Modi has built his political image around big spending - streamlined trains that zip through rural stations, highways to forgotten towns, and the like. Fiscal consolidation isn’t quite as photogenic. Nobody organises ribbon-cutting ceremonies when the debt-to-GDP ratio ticks downward.

Nevertheless, ministers have promised to lower this proportion to 50 per cent by 2031.

The main reason for this might be to get markets to look away from persistently high fiscal deficits - almost 5 per cent last year - by focusing their attention on another figure. But reducing debt by 30 percentage points of GDP won’t be easy either, even if growth stays above 7 per cent. Officials will have discovered by now that either route means that capital expenditure will have to be cut.

Infrastructure spending hasn’t gotten the private sector to invest, and isn’t paying for itself through additional growth. Modi has to accept that the government must tighten its belt; he doesn’t have any other weapons left in his arsenal. A state that mops up less credit is his best chance to get private investment flowing again. To ensure India’s future growth, he should stop borrowing against it.