What was not recognised was that the change in policy stance in the 1990s should not just provide the expected stimulus, but that that stimulus had to be strong enough to counter a number of adverse implications of the reforms for manufacturing and industrial growth. To start with, it was inevitable that import liberalisation would result in some displacement of existing domestic production either directly by imports or indirectly by new products assembled domestically from imported inputs. Second, that the reduction in customs duties resorted to as part of the import liberalisation package and the direct and indirect tax concessions that were provided to the private sector to stimulate investment, especially starting with the budget of 1993-94, would lead to a significant reduction in the tax-GDP ratio at the Centre by anywhere between 1.5 to 2 percentage points of GDP. This implied that the fiscal stimulus associated with any given level of the fiscal deficit would be lower than would have otherwise been the case. Finally, after some initial slippage in the deficit reduction effort, which took the fiscal deficit to relatively high levels in 1993-94, the government has managed closer even if not full adherence to fiscal deficit targets, so that the stimulus provided to industrial growth by state expenditure was substantially smaller than was the case in the 1980s.
 
This of course leaves unexplained the three years of remarkable growth during the mid-1990s. As we have seen, the trend rate of industrial growth during the 1990s was overwhelmingly influenced by the recovery and boom during the three years starting 1993-94. In fact, this three-year mini-boom (as reflected in movements in the IIP) is puzzling for three reasons. First, it cannot be explained by increased fiscal stimulus from state. It is true that the industrial recovery in 1993-94 was accompanied by a sharp rise in the fiscal deficit of the central budget to 7.5 per cent of GDP, but the subsequent two years actually saw a reduction in that deficit to 6.9 and 5.9 per cent respectively. Second, the years of high growth were the ones in which the government vigorously pursued a strategy of import liberalization and customs tariff reduction, resulting in a large inflow of imported manufactures into the Indian market. To the extent that such imports displaced local production catering to domestic demand, it should have slowed down the growth in industrial output. Finally, those were years when real interest rates had risen to extremely high levels by historical and international standards. This also should have discouraged industrial investment and therefore the growth of domestic production.
 
We therefore need to look elsewhere for features of liberalization that spurred manufacturing production. There is one supply side factor that may have operated in this manner. It has been known for some time that one consequence of the complex of import substitution policies pursued by India till the mid 1980s was the pent-up demand for a range of manufactured goods, including specific brands of such goods. While knowledge of these could be acquired by consumers and producers from the international market, the products themselves could either not be acquired within India or acquired only at prohibitive costs. Liberalization of the kind pursued in India, which freed access to intermediates, components and capital goods while protecting most end-products, along with reducing tariffs substantially, allowed for the expansion of  domestic production/assembly and sale of these commodities in a relatively short span of time. This occured at two levels : first, by relatively small firms that combined cheap imports and domestic parts to service what is not always correctly described as the "grey market"; and second, by larger firms, very often in collaboration with international producers with a well-cultivated brand image.
 
While such products did have a ready market, they would not have contributed to a net addition to domestic production to the extent that they displaced similar or other products in the consumer's basket of purchases. If the availability of new goods were to spur growth it needed to be accompanied by a net accretion to demand after accounting for the displacement of previously available "substitutes". In the short run such net additions to demand can be financed either with the flow of hitherto unaccounted incomes into the market for goods, or with an element of dissaving reflected by reduced financial savings, or through increased recourse to consumer credit. There is reason to believe that in much of urban India and some parts of rural India, such a tendency was underway, driven by easier access to credit, including consumer credit provided to individuals.
 
The 1993-1995 “mini-boom” was thus the result of a combination of several once-for-all influences, in particular
the release of the pent-up demand for a host of import-intensive goods, which (because of liberalization) could be serviced through domestic assembly or production using imported inputs and components. Once that demand had been satisfied, further growth had to be based on an expansion of the domestic market or a surge in exports. Since neither of these conditions was realised, industry then entered a phase of slow growth.