It must be noted here that the phenomenon of ‘pent-up’ demand was not restricted to those who had the wherewithal to realize it as soon as supply-side constraints to their realization were removed. The tendency existed among other sections as well. As mentioned earlier, financial liberalisation had as its corollary the entry of new financial players into the market and the diversification of banks and non-bank financial companies into new areas of lending that promised higher returns. One such area was lending for consumption purposes, which substantially increased the number of people who could access significantly large sums as credit to make lumpy purchases. Further, the ‘windfall gains’ registered by a significant number of central and state government employees as a result of the payment of arrears following of the implementation of the Fifth Pay Commission’s recommendations, also contributed to n increase in the number having the wherewithal to contribute to such demand. It is indeed true that while industrial firms and rich agriculturalists contributed to such pent-up demand as well, the bulk of such purchases would be of consumer durables by households. This explains the more consistent performance of the consumer durables sector. And given the overflow of the consumer durables into the capital goods category, it possibly explains the longer boom in the capital goods sector. Put together this could shore up industrial growth in particular years, as for example in 1999-2000, despite the small share of consumer druables in total industrial production. It follows that when such demand is satiated and cannot be sustained any further, the overall tendency is towards slower industrial growth on average if other stimuli such as state expenditure do not substitute for the once-for-all stimulus, as was true by the end of the decade.
 
The above argument needs to be clarified. Our intention is not to suggest that slow growth is an inevitable consequence of a ‘positive’ aspect of the reform, which is what fiscal deficit reduction is taken to be. Rather, the stress is on three features. First, that the expectation that reforms would trigger the “animal spirits” of private investors, spur private investment and ensure the efficiency of such investment, has been belied. Second, that the belief that liberalisation of import and foreign investment rules would lead to a large inflow of foreign direct investment, which would use India as a base for world market production, has been proven to be misplaced. If such foreign investment had indeed come in large measure in the wake of the reform, India would have recorded a much-needed expansion in manufactured exports, which would have provided the stimulus for industrial and overall economic growth. In practice, even that additional foreign investment that did come has not been into greenfield projects and has been targeted at the domestic market rather than at export production. The third feature is that, even though the above expectations have remained unrealised and though conditions have turned conducive for increasing state expenditure and triggering growth, the neoliberal obsession of the government with curbing the fiscal deficit has only worsened the problem of decelerating industrial growth. At present, not only is industry saddled with substantial excess capacity and inflation running at historic lows, but the government has at its disposal large stocks of foodgrains and a comfortable level of foreign exchange reserves. Expanding expenditure, even if deficit-financed, would help expand employment and output and in part contribute to an increase in the tax revenues of the government. Many have argued that using the foodstocks for a massive food-for-work programme geared to strengthening rural and urban infrastructure is a major growth opportunity available to the government. But its failure to respond positively to such advice has meant that the industrial downturn threatens to transform itself into deep recession.
 
The failure to use the above opportunity is, however, not just the result of an ideological obsession with fiscal deficit reduction. It is in large part explained by the government’s fear that the threat held out by international finance that it would react adversely to any return to an era of high deficits is real. The years of liberalisation have seen a substantial increase in the presence of international financial players in India markets, through the provision of credit, through investments in the stock markets and through financial investments of other kinds. Any sudden decision on the part of these players to withdraw their capital would not only result in a slump in stockmarkets, but could also threaten the viability of many firms and financial entities as well as precipitate a balance of payments and currency crisis. This situation resulting from the increase in dependence on purely financial flows generated by the reform in large part explains the paralysis of the government in the face of what appears to be a sharp slide into recession in India’s industrial sector.
 
What is worse, desperate to find a way out, the government is resorting to all manner of means such as bleeding public sector corporations of their surpluses, privatising them at rock bottom prices and using unwarranted and economically indefensible off-budget measures to generate additional funds. Unfortunately, while these measures are proving inadequate at resolving the fiscal impasse, they are undermining the long run growth and revenue generating potential of the system. But as has been true in Russia, Turkey and Argentina, international finance, led by the World Bank and the IMF, has been unwilling to criticise such moves and push for enhanced tax and deficit financed expenditures in their place. This is a sure means of inviting a crisis, even when the opportunity to forestall is obvious.