ISID Working Paper 198, 2017
The present study is an attempt to examine the impact of international trade on manufacturing productivity in India. The literature on international trade suggests that the productivity of domestic manufacturing sector will rise through the effects of economies of scale, reallocation, competition, and spillover channels from trade participation. To study the net impact of these effects on productivity, we constructed trade related variables such as relative import price, import penetration and export intensity for a panel of 17 2‐digit organised manufacturing sector industries for the period 1980 to 2013. During this period, the Indian manufacturing sector witnessed considerable
liberalisation and openness coupled with an increase in manufacturing growth and productivity, especially in the recent decades. There is evidence of a shift in the composition of sectors—from traditional labour‐intensive products such as food, beverages, tobacco, and textiles, to modern‐skill and knowledge‐intensive industries such as chemicals, machinery, and transport equipment. This is accompanied by a noticeable growth in productivity, both labour productivity and total factor productivity, especially during the 2000s. The panel econometric estimation result, based on random effect modelling, reveals the presence of trade induced productivity gains in manufacturing. The productivity enhancing effects of economies of scale, reallocation and spillover largely operate through imports and become prominent after 1–2 year lag. However, 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, we find trade linked productivity gains being 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.