Economic reforms and industrial performance : an analysis of capacity utilisation in Indian manufacturing

Abstract

This paper examines the performance of Indian manufacturing
\nsector in terms of economic capacity utilization (CU), over 1974-1998.
\nAn attempt is also made to understand the impact of policy changes,
\ninter alia, on the observed movements of CU. The economic CU, defined
\nas the realization of output at which the short run average total cost is
\nminimized, is estimated using a translog cost function. We observe
\ncyclical movements in CU over the period. Three distinct phases have
\nbeen identified with regard to the movements in CU. While phase one
\n(1974-1984) is characterized by relatively wide fluctuations, phase two
\n(1985-1990) witnessed a roughly stable level of utilization. In the third
\nphase (1991-1998), a variant of the fluctuations witnessed in the first
\nphase is seen to have resurfaced. Interestingly, there has not been any
\nsignificant correspondence between the observed phases of CU with the
\ncorresponding policy environment. While supply and demand side factors
\nare significant in determining CU in Indian manufacturing, the impact
\nof economic reforms per se is not remarkable.
\nKey words: India, Manufacturing, Capacity Utilization, Economic
\nreforms
\nJEL Classifications: D24, L5, L60, O47