There is growing official recognition that the economic slowdown is severe. This week, Prime Minister Manmohan Singh admitted that economic growth in the current fiscal year would be 7%. The Reserve Bank of India is also likely to cut its growth forecast to the same level when it presents its monetary policy on 24 January. The official growth forecast has been brought down over the past few months with metronomic regularity, as harsh realities trumped airy hopes. The final growth number in FY12 could well be in the sub-7% territory, at least 2 percentage points lower than what we were told to expect in March 2011.

The most serious emerging problem—now that inflation has perhaps peaked - is the clouding of the investment climate. To be sure, Reliance Industries Ltd chairman Mukesh Ambani said late in December that his companies will invest more than Rs 70,000 crore in India in the next few years. There are other groups that also have large capex plans. But the macro numbers are disappointing. The Centre for Monitoring Indian Economy released numbers this week that showed proposals for new investment hit a five-year low in 2011.

Getting investments back on track is perhaps the most pressing need right now; the growth accelerations of the mid-1990s and the mid-2000s coincided with splendid booms in corporate investments. India needs more investment activity at this stage of the economic cycle, though the road ahead is not an easy one. One doubts whether the anticipated reductions in interest rates in the year ahead will solve the problem on its own unless there are significant policy reforms to raise business confidence. The government does not have the freedom to increase its capital spending; the entire fiscal expansion since 2008 has been driven by consumption spending by the government, an imbalance that was a major driver of high inflation.

Two possible ways to stimulate investments and growth, given the current constraints, would be to encourage public sector companies to use their ample cash reserves for new projects (rather than raid their treasuries for high dividends that will be used to plug the revenue gap) and breathing fresh life into the national roads programme (with its significant multiplier effects in industries such as steel, cement and heavy machinery).

This is a critical juncture. How the Indian economy performs in the next year or two will indicate whether the current slowdown is cyclical or structural. There are growing risks that it could be the latter. It is worth remembering that the robust growth rebound after 2009 had raised fresh hopes about double-digit growth; the Economic Survey of that year had said the goal was possible in the near future. It’s a more sober world view now.

Optimists point out that Indian economic performance is not bad given the state of the world economy. There is some merit in that argument, though it overlooks the fact that the inability to move to a higher growth plane will eventually hurt the ability of the nation to attack mass poverty (countries such as South Korea and China have, in different periods of time, been able to maintain high growth despite a weak global economy).

A look at the economic performance in recent decades is instructive. India began to accelerate after 1980. The economy had grown by a sickly 2.9% a year on average during the turbulent 1970s. But then not only did the economy pick up speed, but the decadal rate of growth kept inching higher: 5.6% in the 1980s, 6.3% in the 1990s and 7.3% in the previous decade.

There were the mandatory swings, including the severe slowdown between FY01 and FY03. But the trajectory was unmistakable. The Indian economy was growing at an ever-faster rate with each successive decade. This growth has helped raise average incomes from $265 in 1980 to $1,527 in 2011, according to International Monetary Fund data. Similar growth over the next three decades, assuming constant population growth and a stable exchange rate for the sake of convenience, could take average Indian incomes to around $8,700 a year, or roughly equal to where countries such as Mexico, Malaysia and Argentina are right now.

In other words, growing at an average rate of 6.5% will ensure that reduction in poverty will be far too slow. Raising the average growth rate to 9% a year will help India reach a per capita income of $8,700 in 20 years, thus saving a decade. In other words, every percentage point in lost growth will hurt if the impact is tallied over a few decades.

Niranjan Rajadhyaksha is Executive Editor at Mint.

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