Ever since the Congress-led United Progressive Alliance (UPA) came to power, the entire country has held its breath wondering what the impact upon the economic policies will be of its dependence for its very survival upon the Left Front. The first indications were not reassuring. Within hours of the formation of the new government, members of the Left front declared themselves against increases in the prices of essentials that would reduce the fiscal deficit, against privatisation in general, and against giving employers freedom to hire and fire.

The common minimum programme (CMP) heightened fears because it indicated that the government would give priority to issues of redistribution over those of growth, and made commitments that would increase the government''s social spending without saying anything specific about where the money would come from.

But the very first concrete challenge that the new government has faced has shown how exaggerated most fears have been. Faced with skyrocketing petroleum prices the government has lost no time in adjusting the prices of gasoline, diesel and cooking gas upwards. What is equally significant is that it has done so with full support from the Left.

The Left''s behaviour on this occasion is in striking contrast to its behaviour eight years ago when the United Front government came to power. On that occasion, too, Mr P Chidambaram, the finance minister, faced a sudden rise in oil prices from $16-18 a barrel to over $25 a barrel. One of his first acts was to announce an increase in petroleum product prices. But this was shot down within minutes by the Left Front members of the United Front''s co-ordination committee. As a result the deficits in the country''s oil pool account kept mounting for a full two years and were finally ''abolished'' by being turned into interest earning securities. The constructive stance of the Left this time shows what a long way it has come.

But the manner in which the oil product prices were raised, and the understandable concerns that went into its engineering only serve to underline the truly daunting task that the UPA faces if it is to meet even a fraction of the commitments that it has made to the people. For in order to reduce the impact of the international increase in oil prices on peoples'' pockets, the government has partly offset the price increase given to the oil firms by reducing the excise duty on gasoline, diesel and LPG. The net result will be a decline of Rs3,000 crore in excise revenues over a full year.

And that brings us face to face with the question that no one wants to answer: if the litmus test of any policy the government adopts is to be that it must not reduce the real income of anyone in society, then how will the government raise the resources it needs for increasing investment in infrastructure, agriculture, education and health? Without a substantial increase in investment, how will the government raise the growth rate from the present five per cent per annum to over 7 percent? And without raising the growth rate to more than seven per cent, how will the government make employment start growing vigorously again, as it had done in the mid-nineties?

As the CMP acknowledged, the only way to augment public investment without resorting to deficit financing is to reduce the revenue deficit in the budget. This can be done in theory either by reducing expenditure on the revenue account or by increasing tax revenues. But in practice, as the Clinton administration showed in the US in the nineties, the surest and least painful way is to make an initial heavy cut in government expenditure, invest the sum saved and allow the resulting increase in industrial growth to widen the tax base and increase tax revenues.

Provided it keeps a reign on its consumption expenditure, the increase in tax revenues will enable the government to increase investment, widen the tax base and increase tax revenues still further. This is the virtuous cycle that Clinton set off with his efforts to curb the growth of the fiscal deficit during his first term in office. Halfway through his second term, thanks to a sustained growth of GDP, the US budget deficit had all but vanished.

The key to starting such a virtuous circle in India is to reduce the Centre''s revenue deficit, now estimated to be Rs112,000 crore, by Rs30,000 crore or thereabouts, increase planned investment by an equal or even slightly larger amount (preferably in the infrastructure) and allow the consequent increase in demand to push the already rising industrial growth rate to above ten percent. All the rest will follow.

Since there are only eight months left in the current fiscal year, the government does not have to attempt all this in the very next budget, and can spread its initial cut in subsidies and fillip to investment over the next two budgets. But what it absolutely must give in the coming budget is an unmistakable signal to investors and the money markets that this is what it plans to do.

Whether with good reason or not, investors have been badly shaken by the contradictory signals that have emanated from the UPA and by its dependence upon the Left. All they need to regain confidence in the future of the Indian economy is one signal — in deeds and not words — that this government will not flinch from taking hard decisions if they become necessary to safeguard its growth and efficiency. Reducing the revenue deficit by cutting back subsidies is one sure way of doing so.

* The author, a noted analyst and commentator, is a former editor of the Hindustan Times, The Economic Times and The Financial Express, and a former information adviser to the prime minister of India. He is the author of several books including, The Perilous Road to the Market: The Political Economy of Reform in Russia, India and China, and Kashmir 1947: The Origins of a Dispute, and a regular columnist with several leading publications.