Influence of Liberalization on the Indian Manufacturing Sector: Empirical Evidence Over 1987–2018

Abstract

The liberalization initiative commenced in India from 1991 onwards, replacing the four-decade long import substitution policy. The primary objective was to enhance the role of foreign and private investment, in line with the newly embraced outward-oriented growth model. The government had undertaken several policy initiatives since then, especially to strengthen the manufacturing sector which plays an important role in the economic development of any country. The current study evaluates the effects of the liberalization policy in India on industrial outcomes. Recent studies have found that when firm heterogeneity is present in trade models, reforms will lead to a decrease in the number of firms and a rise in their average size (Melitz, 2003). A dataset of 24 manufacturing industries had been used in the current study. We test empirically whether liberalization had led to a rise in the average size of establishments as stated in the literature. We also attempt to analyze the magnitude of trade costs in terms of the impact of reforms on wages and prices. The empirical analysis based on the difference-in-difference (DID) estimation method shows that on average, trade reforms do not lead to an increase in the real wages and average size of establishments. In addition, prices appear to increase in the long run due to liberalization, with potential ramifications.

Citation

Ahmed, A. and Chakraborty, D. (2024), "Influence of Liberalization on the Indian Manufacturing Sector: Empirical Evidence Over 1987–2018", Bhattacharyya, R. and Mazumdar, D. (Ed.) Contemporary Issues in International Trade, Emerald Publishing Limited, Leeds, pp. 113-125. https://doi.org/10.1108/978-1-83797-320-020241008