Crisis? What crisis? Indian policymakers are not asking such a complacent question. But India has had a “good crisis”. Now its task is to unwind the exceptional support given to the economy and push through the reforms needed to sustain fast and inclusive growth.

When Pranab Mukherjee, the finance minister, presented his budget last week he noted that a year ago, India confronted a double challenge: the global crisis, and a poor monsoon. Now, “I can say with confidence that we have weathered these crises well.” As the Indian government's Economic Survey put it: “A variety of stimulus packages were put in place in the second half of 2008-09, in the Interim Budget 2009-2010 and, again, three months later, in the main Budget 2009-2010. By the second quarter the economy showed signs of turning; and now, close to the end of the year, India seems to be rapidly returning to the buoyant years preceding 2008.” In the 2008-09 financial year, India's gross domestic product expanded by 6.7 per cent. This year it is forecast to grow by 7.2 per cent. If the Indian economy has succeeded in surviving this test with so little damage, even cautious analysts must be more optimistic about the future.

Stimulus has its costs. The central government's fiscal deficit expanded from 2.6 per cent of GDP in 2007-08 to a provisional figure of 5.9 per cent in 2009-09 and an estimate of 6.5 per cent for this year. If one includes the states, the deficit jumped from 4 per cent of GDP in 2007-08, to 8.5 per cent in 2008-09 and a forecast of 9.7 per cent this year. India's nominal GDP grew at an average rate of 14 per cent between 2004-05 and 2009-10. That makes deficits of 10 per cent of GDP quite sustainable. I wish that were equally true of the UK.

Nevertheless, continuation of such deficits is undesirable. First, much of the spending – particularly on fertiliser, food and petroleum subsidies – is poorly targeted. Second, the public sector's savings collapsed from 5 per cent of GDP in 2007-08 to 1.4 per cent in 2008-09. This needs to be reversed.

Before the crisis the country's gross savings rate had hit 36 per cent of GDP (see chart). Given the country's attractions to long-term foreign capital, that would allow an investment rate of close to 40 per cent of GDP. Such a high rate of investment could deliver 10 per cent growth. It might deliver even more: since India's output per head (at purchasing power parity) is roughly a fifteenth of that of the US, the potential for fast growth is huge.

The extent of the optimism became evident during a week spent in India last month. Among the highlights was a conference on a book of essays in honour of Montek Singh Ahluwalia, deputy chairman of the planning commission and, after Manmohan Singh, prime minister, India's most influential economic policymaker of the last two decades (and a friend of mine for 39 years).*

I was struck by the upbeat tone of the essay on “macroeconomic performance and policies, 2000-8” by Shankar Acharya, a former chief economic adviser to the Indian government. Dr Acharya is the most sober of competent analysts of the Indian economy. Indeed, the book gives a strong sense of the confidence of the technocratic elite in India's performance and prospects. Similar confidence is palpable among the business elite. This confidence makes this a radically different India from the one I knew when I was the senior divisional economist for India, at the World Bank, in the mid-1970s. The emergence of an elite consensus on where the country is going is clear to any regular visitor. When entering the commerce ministry, bastion of opponents of open markets in the 1970s, I was struck by a poster describing India as the “world's largest free-market democracy”.