Relation between Labour Productivity and Export Competitiveness of Indian Textile Industry: Co-integration and Causality Approach

Abstract

The most important factor impacting the export competitiveness (EC) of an industry is productivity trends. One such significant variable of productivity can be labour productivity (LP). The purpose of this article is to examine the relationship between LP and EC for the Indian textile industry in the post-liberalization period, that is, from 1991 to 2015. The present study uses Johansen and Juselius test for examining the co-integration between select variables and reveals the long-run relationship between the select variables for Indian textile industry. The study uses Granger causality test to explain the direction of causation between the select variables for the analysis. The results of the present study show the absence of feedback effects among the variables, and only unidirectional causality is found. The result of the Vector Error Correction Model (VECM) reveals that there is no long-run or short-run causality running from independent variable to dependent variable. The diagnostic tests are performed, and the result indicates that the model has the property of goodness of fit. The study recommends that the productivity-based wages policy should be implemented by textile firms.