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Has liberalization affected profit margins in Indian Industry?

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  • Uma S. Kambhampati
  • Ashok Parikh

Abstract

In this article, we analyse the determinants of firm‐level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980–98, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables – advertising, Research and Development (R&D), capital–output ratios and managerial remuneration – though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected.

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  • Uma S. Kambhampati & Ashok Parikh, 2005. "Has liberalization affected profit margins in Indian Industry?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 273-304, July.
    • Handle: RePEc:bla:buecrs:v:57:y:2005:i:3:p:273-304
    DOI: 10.1111/j.0307-3378.2005.00224.x
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    Cited by:

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    2. Nihar Shembavnekar, 2019. "Economic Reforms, Labour Markets and Formal Sector Employment: Evidence from India," Economies, MDPI, vol. 7(2), pages 1-42, April.
    3. Nihar Shembavnekar, 2018. "Did India’s economic reforms generate jobs? Essays on economic liberalisation, labour market flexibility and employment in the Indian manufacturing sector (1990-2006)," Economics PhD Theses 0917, Department of Economics, University of Sussex Business School.
    4. Basant, Rakesh & Mishra, Pulak, 2017. "Vertical Integration, Market Structure and Competition Policy: Experiences of Indian Manufacturing Sector during the Post Reform Period," IIMA Working Papers WP 2017-09-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    5. Alokesh Barua & Debashis Chakraborty & Hariprasad CG, 2012. "Entry, Competitiveness and Exports: Evidence from the Indian Firm Data," Journal of Industry, Competition and Trade, Springer, vol. 12(3), pages 325-347, September.
    6. Kambhampati, Uma S. & Kattuman, Paul A., 2009. "Growth responses to competitive shocks: Market structure dynamics under liberalisation," Structural Change and Economic Dynamics, Elsevier, vol. 20(2), pages 114-125, June.
    7. Tanveer Ahmad Khan & Indrani Chakraborty, 2022. "Dynamic Interactions Between Structure and Performance in the Textile and Clothing Industry in India: An Econometric Approach," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(1), pages 173-209, March.
    8. Hoedoafia, Mabel Akosua, 2019. "Trade Liberalization and Firm Profitability: Insights from Ghana's Manufacturing Sector," MPRA Paper 97133, University Library of Munich, Germany.
    9. Barua, Alokesh & Chakraborty, Debashis & Hariprasad, C. G., 2010. "Entry, Competitiveness and Exports: Evidence from Firm Level Data of Indian Manufacturing," MPRA Paper 22738, University Library of Munich, Germany.

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