A caveat is called for at this point. It is well known and widely accepted that the reliability of the IIP declines when we move to more disaggregated levels of industry. Further, there is a substantial degree of overlap between the capital and consumer non-durable categories. Automobiles, purchases of which for personal use rose substantially during the 1990s, are included in the capital goods category. So are electronic goods of certain kinds that would be more appropriately classified as consumer-durables. This overflow of consumer durables into the capital goods category makes it difficult to assess the degree to which any slump or recovery in capital goods is driven by consumer durables. It also implies that the small weight of consumer durables in the overall index, does not do full justice to the importance of this sector from the point of view of industrial growth.

All this is of relevance when we seek to explain the process of growth and industrial deceleration during the 1990s. It needs to be recognised that the liberalisation programme of the 1990s had a number of adverse implications 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.
Chart 11 >> Chart 12 >> Chart 13 >>

It is despite all this that India witnessed the three-year mini-boom in industrial growth during 1993-94 to 1995-96, which as we have seen has had an overwhelming influence on the trend rate of industrial growth during the 1990s. The explanation for this boom, despite the adverse consequences of liberalisation for growth in industry, lies in the effects of liberalisation on demand. 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 occurred 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.
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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, though the percolation of such demand to lower income deciles facilitated by the consumer credit boom, kept consumption goods growth going at above average levels in many years. That is, 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, and could realise itself in the form of actual demand because financial liberalisation, which 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, resulted in a boom in consumer credit that substantially increased the number of people who could 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. 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.