History will regard the Indian boom years of 2003-2008 as one big squandered fiscal opportunity. Seldom was there a more favourable alignment of stars for strengthening the public sector balance sheet.
The global savings glut meant that interest rates and hence borrowing costs of government were low. The rapid overall growth rate meant that revenues were buoyant.
This combination of 9 per cent real growth and 3-4 per cent real interest rates should, over the boom years, have led to rapid declines in government debt as a share of GDP.
India should have entered the crisis with a debt-to-GDP ratio closer to 60 per cent than 80 per cent. Instead, debt failed to decline, and crisis-induced developments (collapse in revenues and escalation of spending) are only likely to worsen the fiscal situation.
To be sure, the commodity boom beginning in 2006 was a strong negative fiscal shock. But this shock came towards the end of the boom years and cannot explain or justify the fiscal situation spinning out of control.
But spinning out of control it is: deficits are mounting, and, even though the RBI is valiantly providing succour by monetising government debt, the market is reluctant to digest large and growing amounts of government IOUs.
Interest rates are heading north, and as the recovery gains momentum and the demand for credit grows, the crowding out effect of the fiscal deficit will bite even further.
The contrast with China is instructive. China too enjoyed rapid growth, in fact 2-3 per cent points greater than India's, and China too did not bring its public debt down as a share of its GDP.
But, at about 20 per cent of GDP, China had very little debt to bring down in the first place.
More significantly, China used its soaring revenues to build up assets in the form of public infrastructure, which has provided the basis for further growth. India neither reduced government liabilities nor built up assets. Instead, revenues went toward greater government consumption and subsidies.
The problem, of course, is that the crisis is skewing the fiscal policy discourse. Achieving fiscal consolidation will be seen and stated as a medium term project, while providing more stimulus will be acted upon as a short term imperative.
It is this imbalance that must be rectified in the July budget that the new government will present.
A dream budget would pay lip-service to short term stimulus but spell out the concrete actions to rein in spending and boosting revenues as soon as the crisis has passed.
It is not the case that the government does not know what to do.
The key ingredients of medium term fiscal consolidation are well-known: on the revenue side, a major boost to tax revenues and buoyancy would be provided by implementing the goods and services tax; and on the expenditure side, subsidies would have to be pared down.
Sales of public sector assets, while not a permanent means of fiscal improvement, can provide one-off relief and help retire some of the stock of existing government debt.
The problem for the government is political. Implementing the GST, difficult as that will be, pales in comparison to the challenges of eliminating the various subsidies. As Devesh Kapur and I argued in these pages on Saturday, politicians can contemplate action against subsidies only if they are seen to be providing a simple and more effective alternative that is seen as helping the poor.
Developing such an alternative -- for example, a direct cash transfer scheme to households below the poverty line -- will take time and political effort, which must begin now to provide even the ghost of a chance of any medium term improvement in the fiscal situation.
But where can the government find the resolve or the inspiration to take on the fiscal challenge? It need look no farther than China and its experience in the global crisis.
Even before this global crisis, China was building up its superpower credentials courtesy of its size, spectacular growth and integration, not to mention its military might.
The crisis has allowed these credentials to be consolidated further. China has moved beyond being the super-power-to-be. One important reason for this consolidation relates to China's public sector balance sheet.
There is considerable alarm in the United States over the potential loss of pre-eminence stemming from the precariousness of its fiscal future. This theme is dominating the popular economic discourse.
The cost of acting to avert current economic disaster has been the impairing of future government finances.
In this respect, the fate of the US is not unique: it is shared by the United Kingdom, Japan, and Italy, and even France and Germany will look weaker once they admit to the full scale of the problems in their financial systems.
The one major country that has had the ability to take short term action to offset the effects of crisis without remotely jeopardising its long run economic strength has been China.
Its public debt will remain at close to 20 per cent of GDP after the crisis while the corresponding number for the United States is estimated to be close to 75 per cent of GDP.
China seems to be the one fiscal safe haven even as all the other powers wobble under the weight of their fiscal burden. As the mighty fall, China is standing economically and fiscally tall.
The lesson for superpower-aspiring India from superpower-arriving China is simple: a strong fiscal situation, undergirding the ability to respond to a crisis, is an essential ingredient for any global leadership role.
So, when India goes through its next growth spurt, it should be mindful of avoiding the mistake of the previous one. Good boom-time fiscal management provides the firepower for times of bust. The reasons for doing so are and must be overwhelmingly domestic.
But there may also be strategic, external benefits from doing so. Fixing the fiscal roof when the sun was shining was China's way out of this crisis and way to solidifying its superpower status. That is a lesson that strategically-minded Indian policy makers should take away from China's experience in the crisis. And that should be the thrust of the budget that Mr. Pranab Mukherjee will present to Parliament in July.
The author is a Senior Fellow, Peterson Institute for International Economics and Center for Global Development, and Senior Research Professor, Johns Hopkins University.