Abstract:
Purpose – The purpose of this paper is to assess the impact of India’s trade liberalization during the late
1990s and 2000s on productivity of manufacturing firms and verify whether the productivity-enhancing
impact of reductions in input tariffs was greater than that of output tariff cuts, as found in some earlier studies.
Design/methodology/approach – Firm-level (company-level) data drawn from Prowess database are
used for the estimation of total factor productivity (TFP) at the firm level, done by using the Levinsohn–Petrin
methodology. Econometric models are estimated to explain firm-level TFP. The explanatory variables used
are output and input tariff rates and quantitative restrictions on imports at the industry level and firm
characteristics such as firm size, export intensity and import intensity. Firm-level panel data for 2002-2010 or
for a longer period 1998-2010 are used for the estimation of econometric models. Model estimation is done by
applying the fixed-effects model and IV-2SLS, 3SLS estimators and EC2SLS estimators.
Findings – Trade liberalization had a significant positive effect on the productivity of Indian
manufacturing firms. The lowering of output tariff had a greater beneficial impact on TFP of Indian
manufacturing firms than the lowering of tariff on intermediate inputs.
Originality/value – Good deal of care has been taken in the measurement of output and inputs for the
purpose of TFP measurement. Two alternative frameworks, gross output and value added, are used. This
helps in making a better estimate of the impact of trade liberalization on TFP.
