A recent email written by Ratan Tata to chief executives of various Tata group companies is vivid proof that businessmen are getting more circumspect by the day. Five years of cheap money and an unprecedented economic boom encouraged companies to take risks, some that will pay off and some that inevitably will not. What we are now seeing is a retreat from risk: It has become a four-letter word.

Illustration: Jayachandran / Mint

John Maynard Keynes had argued that such swings in the business psyche have to be heeded. Keynes said that new investments are driven by what he called the animal spirits of entrepreneurs. It’s a controversial theory. Many economists violently disagree with it and dismiss it as a delightfully vague explanation of investment trends. But it is at times such as these that such a theory makes new sense. The retreat from risk and the drying up of foreign capital flows threaten new business investment in India. The government is busy goading banks to lend and companies to invest. Such haste is unwarranted. What companies are likely to do now is to pause for breath and focus on the entrails of their businesses, through cost cutting, tighter working capital cycles, restructured balance sheets and shop-floor efficiency. That is what happened during the late 1990s downturn as well. That episode led to a leaner and fitter Indian corporate sector that was able to grab the opportunities thrown up by the economic boom that followed.

Business confidence is crumbling globally. The emerging consensus is that government spending can be an effective antidote. Prime Minister Manmohan Singh says that India, too, will have more fiscal spending. But let’s face it: India, right now, already has one of the world’s highest fiscal deficits. More spending will put the overall economy at risk. That is the blunt but uncomfortable truth.

How long will it take for business confidence to recover? Write to us at views@livemint.com