Productivity in the Era of Trade and Investment Liberalization in India

Abstract: Over recent years India has witnessed wide-ranging economic reforms in her policies governing international trade and FDI flows. Consequently, both trade and FDI flows have risen dramatically since 1991. Using firm-level panel data this paper finds that significant productivity improvements have taken place in the period since 2000. The paper further explores the important determinants of productivity improvements across a range of different categories. As per the findings of the paper, some of the important determinants of productivity measured by total factor productivity (TFP) include imports of raw materials and capital goods, size of operation, quality of employment captured by wage rates and technology imports measured by royalty payments. It also emerges that R&D in organized manufacturing remains at a nascent stage possibly because of the inadequate emphasis this sphere has been given by the private sector. However, further exploration of this issue is required in order to draw any firm conclusions. Broadly, foreign firms have catered to the Indian domestic market and as a result India is yet to develop as an export platform. Finally, the import-export linkage is not shown to be significant in the sample of import-dependent firms. However, the paper emphasizes that the issue of productivity gains needs to be kept in a balanced perspective. Towards the end, the paper makes some broad policy suggestions in the realm of regional integration focusing on trade in goods and services, investment cooperation, R&D cooperation and human resource development in order to harness regional sources of demand impulses.