International Trade and Productivity Growth in Indian Industry: Evidence from the Organized Manufacturing Sector

Abstract

The present study attempts to examine the impact of international trade on manufacturing productivity in India through the effects of economies of scale, reallocation, competition and spillover channels. To study the net impact of these effects, we constructed trade-related variables such as relative import price, import penetration and export intensity for a panel of 17 two-digit organized manufacturing sector industries from 1980 to 2013. During this period, the manufacturing sector witnessed considerable liberalization and openness coupled with an increase in manufacturing growth and productivity, especially in the recent decades. The panel econometric estimation based on random effect modelling reveals that the productivity-enhancing effects of economies of scale, reallocation and spillover largely operate through imports and become prominent after 1–2-year lag. In the short period, there is some evidence of dominance of negative economies of scale induced by import competition. Although we find a positive association between exports and productivity during all selected periods, the relationship is found to be statistically significant only in the current period. Overall, the trade linked productivity gains is channelled through imports, which persist over time. This reveals that the impact of trade on manufacturing productivity in India is not static but dynamic in nature.