After clawing its way out of six years of near-stagnation, the Indian economy is on the edge of being hurled back into it in the next few days. Its fate will be determined by the budget that the Congress-led United Progressive Alliance will present to parliament on July 8. If this budget puts growth before poverty alleviation the country will achieve both. If it does the opposite, the country will achieve neither. Unfortunately, most of the signals emanating from the government ministries are pointing in the latter direction.

The first came in the new coalition''s common minimum programme. This promised to raise the growth rate from the last five years'' average of five per cent to between 7 and 8 per cent, but said very little about how it would do so. In sharp contrast, two thirds of it was devoted to describing programmes designed to alleviate poverty and create jobs. In particular it made precise commitments to double expenditure on health and education and create an all-India rural employment guarantee scheme that would cost Rs680 billion over a five year span, but made only a vague commitment to the raising investment in the infrastructure.

Investors were particularly alarmed by the fact that all of this additional money seemed earmarked for the already discredited governmental health, education, and rural development agencies. There was no mention anywhere of giving a more prominent role to the private sector or of encouraging private initiatives backed by public funds. The common minimum programme thus conveyed the impression that after ten years of loosening its stranglehold on the economy the Indian state was about to reverse direction towards a command economy, once again.

These apprehensions have made the sensex, the Bombay Stock Exchange''s share price index, drop by a thousand points, a drop of 17 per cent. Bond prices have also crashed, causing interest rates to rise. The volume of shares traded daily on the stock exchanges is only half of what was at the beginning of June. All over the country investors have turned some of their assets into cash, and are waiting to see whether the budget will redress the balance in favour of growth once again.

The Indian economy is so finely poised on the edge of a boom that it will take very little to start the upward climb again. The stagnation that had gripped it ever since 1997 ended in June last year. In the next nine months the share price index rose from below 3,000 to a peak of over 6,100. Industrial growth rose from 5.2 per cent a year earlier to 9.6 per cent in April. This came on top of the best harvest in living memory.

As a result private investment has come back to life after a gap of seven years. Since the last quarter of 2003 there has been a public offer of new shares virtually every fortnight, and nearly all issues have been heavily oversubscribed. All that the government therefore needs to do to sustain the gathering impetus is give an unambiguous indication that it will not sacrifice growth at the altar of redistribution.

The signal that would reignite growth is a clear assignment of priority to investment, especially in the infrastructure, and a willingness to defer making concrete commitments of expenditure on the social sectors till the resulting spurt in growth provides the additional tax revenues needed for the purpose. The signal would be even stronger if the budget reduced some of the subsidies on food, fertiliser and petroleum products that account for half of its current account budget deficit, in order to increase the funds available for investment.

But a budget that emphasises social spending without telling the public from where it will raise the money will feed the fear that it will meet these commitments by further reducing investment in the infrastructure. That will send share prices spiralling downwards again and make the spurt in private investment peter out. In its absence industrial growth will also start to sink after another four months, when farmers have finished spending the money they earned by selling their produce and the ''festival season'' (September -October), when industry pays its annual bonuses to its workers, is over.

The damage will not stop at growth. An even more serious side effect will be to prevent the growth of employment. In the past six years, for the first time in the country''s history, the number of jobs in the modern, ''organised'' sector of the economy fell by more than a million. In addition approximately 700,000 aspirants were turned away every year. The acute insecurity this created was largely responsible for the Vajpayee government''s unexpected defeat.

The Congress was quick to seize upon this, and promised to restore the rate of job creation to what it had been in the mid-nineties, when it was last in power. But to do that it needs to boost the growth rate back to the 7.2 per cent registered from 1993 to 1997. A return to slow, jobless growth, will erode its legitimacy within as little as eighteen months. Were that to happen its capacity to deal with other difficult issues, such as the settlement of the Kashmir dispute with Pakistan, would not remain unaffected either.

* 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.