MANUFACTURING SLOWDOWN 1996 TO 2002

Factors affecting the slowdown depends on two hypothesis

1. Saturation of pent up domestic demand of one for all nature for a host of import
intensive goods which could be domestically assembled or produced following the
trade liberalization. The short run increase in demand was facilitated by easy access to
credit including consumer credit in the wake of financial liberalization once the pent-
up demand of transitory nature is satisfied industry enters the phase of slowdown in the
absence of demand support for domestic exports.

2. Credit crunch triggered the manufacturing slowdown. Unexpected and temporary

tightening of liquidity during 1995-96 resulting in large dollar sales by RBI to contain
volatility in foreign exchange was mistakenly considered as an expression of
deflationary credit policy.

CYCLICAL FACTORS
 Significant fall in government investment since 1995.
 Decline in fixed investment in industry in the context of over expansion of capacities
during the manufacturing boom.
 Slump in the capital market.
Rise  Risk in the real interest rate.
 Lagged effect of negative agricultural growth slowing down the growth of rural demand
for consumer durables.
 Anticipation of high potential demand in the wake of reforms in 1991, manufacturing
sector built up huge capacity through import of capital goods from 1994-1997.
 Exports slowdown Asia wide when manufacturing exports decelerated.
 Slowdown in world trade.
 Sluggishness in global manufacturing prices.
 Variations in cross country exchange rate.
 Real appreciation of rupee.
 Loss of market share to china.

STRUCTURAL FACTORS (binding constraints)

 Inadequate industrial restructuring undertaken with face of growing openness in the
economy.
 External competitive pressure.
 Physical infrastructure bottlenecks.
 Demand supply imbalances that persisted during the reform period.
 Deteriorating infrastructure services representing a direct fallout of shrinkage in
infrastructure investment.
 Decline in real capital formation in electricity, gas, water supply and railways.
 Slow pace of public investment in infrastructure on account of rising fiscal imbalances
of both center and the state government.