Role of trade policies in growth of Indian manufacturing sector

Banga, Rashmi and Das, Abhijit (2010): Role of trade policies in growth of Indian manufacturing sector.

Abstract

Abstract: Indian manufacturing sector witnessed an unprecedented growth in the decade of 2000. Not only did the average annual growth touch 8%, there was a stupendous rise in growth of real exports and real imports of manufactures in this decade. This is also the decade when the average annual growth of real per capita income was the highest (5.6%). In this scenario, the paper examines three issues: firstly, the role played by trade polices and reforms in the growth of the manufacturing sector. Secondly, whether this growth was an export-led growth? And thirdly, what are the successful stories at the industry level. Structural breaks are identified in growth rate of manufacturing sector and growth rates of real exports and real imports using Additive Outliers (AO) and Innovative Outliers (IO) tests. The results show that the reforms of 1991 played a more crucial role than the reforms of 1980s in causing structural break in overall manufacturing growth. Changes in export and import policies which were brought about in 2001 and 2002 led to structural breaks in real exports and real imports of the sector. Time series analysis is undertaken and Vector Error Correction model is estimated using two different specifications to test whether manufacturing growth is an export-led growth or not. Granger causality tests are undertaken to check the causality. The results show that growth of Indian manufacturing sector is not an export-led growth but has been induced by domestic demand and import growth. Motor vehicles and food and food products industries are identified as successful stories with respect to growth in value added and growth in trade while electrical machinery and, chemicals and chemical products with some others are identified as industries which need to be closely monitored as they may have the danger of possible hollowing out.

• Item Type: MPRA Paper
• Language: English
• Keywords: Indian manufacturing sector; Indian manufacturing growth; reforms of 1991; structural break; IO and AO; VECM for Indian manufacturing; Export Led Growth; Hollowing out
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O25 - Industrial Policy; O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; L - Industrial Organization > L6 - Industry Studies: Manufacturing; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade

References

Ahmad, J. and Kwan, A.C.C. (1991) Causality empirical evidence from Africa, Economic Letters 37, 243-48

Anwer, M. S., and R. K. Sampath (2001), ‘Exports and Economic Growth’, Indian EconomiJournal, 47 (3): 79-88

Asafu-Adjaye, J., and D. Chakraborty (1999), ‘Export-led Growth and Import Compression: Further Time Series Evidence from LDCs’, Australian Economic Papers, 38:164-75.

Balassa, B. (1978a) Exports and economic growth: further evidence. Journal of Development Economics 5,181-9.

Balassa, B. (1985) Exports, policy choices, and economic growth in developing countries after the 1973 oil shock=. Journal of Development Economics 18, 23-35.

Berg, H. Van den, and J. R. Schmidt (1994), ‘Foreign trade and economic growth: Time series evidence from Latin America’, Journal of International Trade and Economic Development, 3(3): 121-30

Robert A. Blecker, 2006. "Macroeconomic and Structural Constraints on Export-Led Growth in Mexico," Working Papers 2006-05, American University, Department of Economics.

Chandra, R. (2002), ‘Export Growth and Economic Growth: An Investigation of Causality in India’, Indian Economic Journal, 49(3), 64-73

Chow, P.C.Y. (1987) Causality between export growth and industrial development: empirical evidence from the NICs=. Journal of Development Economics 26, 55-63.

Darrat, A.F. (1987) Are exports an engine of growth? Another look at the evidence,Applied Economics 19, 277-83.

Das, Deb Kusum (2003), “Manufacturing Productivity under Varying Trade Regimes: India in the 1980s and 1990s”, Working Paper No. 107, ICRIER, New Delhi.

Dhawan, U., and B. Biswal (1999), ‘Re-examining Export Led Growth Hypothesis: Multivariate Cointegration analysis for India’, Applied Economics, 31: 525-30.

Feder, G. (1983) On exports and economic growth=. Journal of Development Economics 12, 59-73.

Ghatak, S., Milner, C. and Utkulu, U. (1997) Exports, export composition and growth: cointegration and causality evidence for Malaysia. Applied Economics 29, 213-23.

Ghatak, S., and S. W. Price (1997), ‘Export Composition and Economic Growth: Cointegration and Causality Evidence for India’, Weltwirtschaftliches Archiv, 133(3): 538-53.

Goldar, Bishwanath (2002), “TFP Growth in the Indian Manufacturing in the 1980s”, Economic and Political Weekly, 37(49): 4966-68.

Goldar, Bishwanath and Anita Kumari (2003), “Import Liberalization and Productivity Growth in Indian Manufacturing Industries in the 1990s”, Developing Economies, December, 41(4): 436-60

Granger, C. W. J. (1969), ‘Investigating Causal Relations by Econometric Models and Cross-Spectral Methods’, Econometrica, 37: 424-38.

Greenaway, D. and Sapsford, D. (1994a) What does liberalization do for exports and Growth, Weltwirtschaftliches Archiv 130, 152-74.

Greenaway, D. and Sapsford, D. (1994b) Exports, growth, and liberalization: and evaluation, Journal of Policy Modelling 16, 165-86.

Grossman, G.M. and Helpman, E. (1991) Innovation and Growth in the Global Economy. Cambridge, MA :MIT Press.

Hashim, Danish A., Ajay Kumar and Arvind Virmani (2009), “Impact of Major Liberalization on Productivity: The J-Curve Hypothesis”, Working Paper No. 5/2009-DEA, Ministry of Finance, Government of India.

Shan, J. and Sun, F. (1998a) Export-led growth hypothesis for Australia: an empirical re Investigation Applied Economics Letters 5, 423-8.

Heller, P.S. and Porter, R.C. (1978) >Exports and growth: an empirical re-investigation Journal of Development Economics 5, 191-3.

Helpman, E. and Krugman, P.R. (1985) Market Structure and Foreign Trade. Cambridge (Mass.): MIT Press.

Islam, M.N. (1998) Export expansion and economic growth: testing for cointegration and Causality. Applied Economics 30, 415-25

Jung, S.W. and Marshall, P.J. (1985) >Exports, growth and causality in developin countries. Journal of Development Economics 18, 1-12Jung and Marshall 1985

Kasahara H. and J. Rodrigue, 2008, Does the Use of Imported Intermediates Increase Productivity? Plant-level Evidence, Journal of Development Economics, 87,pp106 118.

Kumari (2010), liberalisation and sources of industrial growth in India: an analysis based on input-output approach, Working Paper, IEG

Mallick, S.K. (1996) Causality between exports and economic growth in India: evidence from cointegration based error correction models=. Indian Journal of Economics 76, 307

Marin, D. (1992) >Is the export-led growth hypothesis valid for industrialized countries=. Review of Economics and Statistics 74, 678-88

Marjit, S., and A. Raychaudhuri (1997), India’s Exports - An Analytical Study, Oxford University Press, New Delhi.

Michalopoulos, C. and Jay, K. (1973) Growth of exports and income in the developing world: a neoclassical view, DP. 28, US Agency of International Development,Washington

Nidugala, G K. (2001), ‘Exports and Economic Growth in India: An Empirical Investigation’, Indian Economic Journal, 47(3): 67-78.Oschos (1989)

Perron, P. and T. J. Vogelsang, \Testing for a Unit Root in a Time Series with a Changing Mean: Corrections and Extensions," Journal of Business & Economic Statistics 10 (oct 1992), 467-470.

Ram, R. (1985) Exports and economic growth: some additional evidence, Economic Development and Cultural Change 33, 415-25.

Ram, R. (1987) Exports and economic growth in developing countries: evidence from time series and crosssection data. Economic Development and Cultural Change 36, 51 72.

Trivedi et al (2011) “Productivity, Efficiency and Competitiveness of the Indian Manufacturing Sector” Reserve Bank of India

Virmani, Arvind (2006a), “India’s Economic Growth History: Fluctuations. Trends, Break Points and Phases,” Indian Economic Review, Vol. XXXXI, No. 1, January-June, pp 81-103.

Virmani, Arvind (2006c), “The Dynamics of Competition: Phasing of Domestic and External Liberalisation in India”, Working Paper No. 4/2006-PC, Planning Commission, April.

Virmani, Arvind (2009), The Sudoku of India’s Growth, BS Books, Business Standard Publication, New Deli.

Virmani, Arvind and Danish A. Hashim (2009); “Factor Employment, Sources and Sustainability of Output Growth: Analysis of Indian Manufacturing”, Working Paper No. 3/2009-DEA, Ministry of Finance, Government of India.

Wallack, J. S., \Structural Breaks in Indian Macroeconomic Data," Economic & Political Weekly 38 (oct 2003), 4312-4315.