As the counting of votes was in progress, pointing to the return of Narendra Modi, unpleasant news broke signalling deep trouble for the new government that would take office. Tata Sons, the owners of the Tata Group, one of India's largest business conglomerates, announced that it was planning to borrow $ 2 billion from the overseas market.

Was capital too scarce in India or the cost of capital so high that even the biggest are feeling the pinch and running after cheap money abroad? The news left one with the distinct impression that putting the economy back on track would be a task that no magnitude of victory could overshadow.

Investment taking a knock is one part of a larger picture. The main reason for it is a lack of funds. Recent data released by CMIE has suggested that new projects are on the decline across the board in the December quarter, both in private and public sectors. Power and manufacturing sectors are the worst hit.

The other part of the picture is that all the lead indicators of consumer demand have, of late, shown a steep fall. Be it consumption of diesel or petrol; vehicle sales; passenger traffic at airports; demand for two and four wheelers; electricity or other capital goods – all have shown a declining trend in the last quarter (January-March 2018-19). There is a fall in both rural and urban income as well as in consumption.

The Indian economy is not firing on either of the two cylinders required to keep it fired up – consumption or investment. And this is leading to a fall in its growth. The economy, which grew at 8.2 per cent in the first quarter (April-June 2018-19), slipped to 6.6 per cent in the October-December period and is expected to go down further to a little above 6 per cent in the last quarter of FY2019.

Soumya Kanti Ghosh, the chief economist of India's largest public sector bank, State Bank of India, said that India was facing a quasi growth slowdown and argued that real interest rates (interest rate adjusted to remove the effects of inflation) were so high in India that they were impacting investment. That essentially means the Reserve Bank of India (RBI) will hand out an even sharper interest rate cut after having given two back-to-back reliefs under the new governor, Shaktikanta Das. But the Finance Commission chairman is against the RBI doing the heavy lifting each time the government indulges in fiscal profligacy.

In a way, the crisis has been created by Narendra Modi-led NDA government, which is set return to office after its thumping victory. Modi Mark 2, is going to inherit a shoddy economy from Modi Mark 1, and they have no other government to blame it on.

So what should the new government do to arrest a widespread slowdown? And, what should it do on an immediate basis to shore up sentiment among investors and households that the worst is probably behind them?

Well, textbook economics says that in such times the government should immediately resort to some heavy lifting and increase expenditure on sectors such as infrastructure building, which can give a leg up to private investment. But whether the government has the fiscal space to increase expenditures soon after taking over is a big question. Both tax and non-tax revenues have gone down in the financial year just gone by, and household savings, which contribute more than half of the total savings in the country, are at a seven-year low.

In this case, other than asking the RBI for deeper rate cuts, the government is likely to depend heavily on windfall gains from the Bimal Jalan panel's recommendations. After all the panel was set up by the Modi government due to its inability to find resources to meet its expenditure. The panel is set to suggest that the RBI give a big buffer chunk, which is close to 10 lakh crore, to the government. But this will weaken RBI finances.

Economists have also urged the government to take up reforms on land and labour laws to give a boost to the economy. There are about 44 central labour laws and 100 state labour laws that need to be pruned for investment to take place and for job creation. A virtual collapse of non-banking finance companies, the lifeline of the informal sector, is another area that needs attention through vigorous financial sector reforms.