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

This paper examines the performance of Indian manufacturing sector in terms of economic capacity utilization (CU), over 1974-1998. An attempt is also made to understand the impact of policy changes, inter alia, on the observed movements of CU. The economic CU, defined as the realization of output at which the short run average total cost is minimized, is estimated using a translog cost function. We observe cyclical movements in CU over the period. Three distinct phases have been identified with regard to the movements in CU. While phase one (1974-1984) is characterized by relatively wide fluctuations, phase two (1985-1990) witnessed a roughly stable level of utilization. In the third phase (1991-1998), a variant of the fluctuations witnessed in the first phase is seen to have resurfaced. Interestingly, there has not been any significant correspondence between the observed phases of CU with the corresponding policy environment. While supply and demand side factors are significant in determining CU in Indian manufacturing, the impact of economic reforms per se is not remarkable. Key words: India, Manufacturing, Capacity Utilization, Economic reforms JEL Classifications: D24, L5, L60, O4