What role does the Government play in economic recovery?

You have conveniently failed to mention  how India has successfully managed the global recession impact. In fact top financial institutions like the World Bank have showered praises on India for its matured and far-sighted economy management. The Government of India introduced a number of timely stimuli to keep the economy going. Now there is move to withdraw the stimuli in a phased manner in view of the economy emerging strong once again. Couldn't we call this middle path approach? (I am not an economist, please!)

I have heard many arguments pro and contra the Keynesian approach. Initially it always appears to work. However, you have to monitor the outcome over a longer time periode to make a final judgement. If you take Japan for instance where the enormous bubble burst more then a decade ago and where pump priming the economy (throug a lot of pork barrel policies) has not helped a bit. And after 17 years the Japanese stock market is still a shadow of what it had been back then. The growth being experienced ever since has been anemic at best and the wealth of the general population has stagnated.

On China the verdict is still outstanding and it will be understood in ten years from now if the loose money policy and the vast government spending will create more then a straw fire. I think we will all be able to learn from the outcome. I have not focussed much on India yet it seems that India has taken the 'middle way' as George Karimalil mentioned.

Nevertheless, it can probably be said generally that governments can not just sit idle when economic indicators suddenly turn south and scores of people end up in unemployment. I would therefore not wellcome a hands-off laissez faire policy as some free economy proponents would suggest. On the other hand governments have to watch their expenses, even though or maybe because all countries have fiat currency systems today which are not backed by gold or another commodity of value. Therefore the international value as well as the national value of a currency depends on how governments deal with the issue. If they spend recklessly and create high deficits and dept trust in the particular currency will eventually suffer and a devaluation against all major global currencies will occur. This will lead to inflation which can easily get out of hand and lead to a severe destruction in value of savings and other assets.

It is therefore advisable to find a 'middle way' with government induced spending and interest rate policy, which will have to be monitored tightly. An economy of any major country in the world behaves like a super tanker. It takes ages to accillerate the beast and it takes about two miles of full stop breaking action to slow it down to a halt. Every move comes with a long delay and this is why governments have to be on guard to step on the break long before it is to late. Break slowly but steadily, do everything in moderation and the outcome will come without unnecessary spikes that cause harm for scores ordinary people.

I think that the 7.9% G.D.P growth rate achieved by us gives credence to the fact that stabilization measures seem to be working.

Added to this, identify the area of the econony which needs to be recovered and stimutale in that area by pumpimg investments.