In 1991, after several decades of inward-looking economic policies, India began adopting significant economic reforms. Among the most important of these were far-reaching trade reforms, which essentially dismantled protectionist policies that had been in place since India's independence. A key objective of the reforms was to increase efficiency, output, and employment growth in the manufacturing sector. The trade reforms initially targeted the capital and intermediate goods sectors; restrictions on the consumer goods sector were only relaxed in the early 2000s. The gradual nature of the reform process, the move from a highly restrictive policy regime to a relatively open one, and the unevenness in reforms across sectors and over time make the Indian economy a good case study for exploring the efficiency implications of trade reforms.
In this chapter, we assess how the Indian manufacturing industry responded to the far-reaching trade reforms of the 1990s. We examine the patterns of industrialization that have emerged in the two decades since the 1991 reforms. We focus on output and productivity growth for the period 1991/92 to 2009/10, as well as key labour market outcomes with respect to employment, wages, and wage share in total income. For this purpose, we use a very rich, disaggregated manufacturing dataset for the same period, which we have specially compiled for this chapter.
The empirical evidence on the impact of the trade reforms on the performance of the Indian manufacturing sector is relatively sparse and not very recent. For example, using disaggregated panel data on Indian industry, Sen (2009) finds clear evidence of trade reforms positively affecting total factor productivity. However, the study period is from 1973/74 to 1997/98, which admittedly is a short period to assess impacts, given that the major trade reforms occurred in 1991 and beyond. Similarly, Milner, Vencappa, and Wright (2007) find that total factor productivity growth was faster in the post-reform period as compared to the pre-reform period. However, their study period also ends in 1997/98. Given that both of these studies only look at economic performance for six years after the 1991 reforms, it is difficult to accept their finding that performance improved with the trade policy reforms with any degree of confidence.