The state of the global economy in 2012 will depend on the delicate balance between a weak Europe and a recovering US.

The European mess is likely to continue. The euro project has survived many scares; there could be a few more in store in the months ahead. Europe as a whole could already be in recession. Many governments in the peripheral countries are borrowing at interest rates that are out of sync with underlying growth rates. European banks are short of capital.

The news from across the Atlantic is far better. The year began with fears that the US was headed into a double-dip recession. The latest data on business confidence, new residential construction, consumer spending during the holiday system, business confidence and jobless claims suggest that the largest economy in the world is stronger than what seemed possible till even a few months ago, when the political deadlock on raising the federal debt limit raised fears of a default.

Generic shoot of ABG Shipyard facility in Surat, Gujarat

This is the grey background against which India will need to reignite its growth engines, especially domestic investment activity. The task does not seem easy, especially given the mood in corporate board rooms and the growing mess in public finances. There is a risk that one more year of drift will damage the medium-term prospects of the Indian economy. A fiscal push is not possible given the growing deficit. The more sensible option is a reforms push to improve business confidence and lower inflation to improve consumer confidence.

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