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While growth slowed during 2008, it remained positive during the early stages of a global downturn that sent manufacturing output in more than a few major countries into a double-digit decline. Capital goods output growth has been especially strong, reflecting the growing share of gross investment in GDP from about 25 percent in 2000 to nearly 38 percent in 2008. Output in the capital goods sector registered annual growth of 9 percent during 2008, although this is significantly slower than the nearly 16 percent average for the 2003-2007 period. Consumer goods output, which enjoyed double-digit annual gains between 2004 and 2006, slowed modestly from 7 percent during 2007 to 6 percent during 2008.
Between 2004 and 2008, the most recent five-year period, most sectors posted moderate to strong growth. The weak link has been metal products and parts, excluding machinery and transport, whose growth since 2003 has been weak and sporadic. The industry sectors with strong growth have been textiles, machinery and equipment, and basic metals. A study showed dependence on infrastructure, on bank and capital market financing, and high labor intensity in production characterize the industries that perform relatively worse, a pattern likely to persist until these policy issues are addressed.
But questions remain about the sustainability of Indian manufacturing growth. The strength and breadth of the global economic recovery will dictate the outlook for manufacturing in both advanced and emerging markets. But Indian policy makers must think beyond the next cycle of global growth.
While some progress has been made, India's domestic business climate still needs improvement. According to the World Bank's 2009 "Doing Business in India" report, India ranks 122 out of 181 countries for ease of doing business. Notable weaknesses are in enforcing contracts, with a rank of 180 and trading across borders, with a 90. The much-discussed problems with infrastructure and still burdensome labor regulations only add to the problematic business climate and are obvious deterrents to accelerated foreign direct investment (FDI) inflows that are needed to sustain robust manufacturing activity. Policies that are fostering a more liberal export climate will benefit manufacturing. But the benefits will be muted if a more supportive domestic business environment is not developed.