Trade Liberalization and Indian Manufacturing Sector Dynamics: A Difference-in-Difference Estimation Approach

The liberalization policies were initiated in 1991 with the primary objective to enhance the role of foreign and private participation, in line with the newly embraced outward-oriented growth model. Since early nineties the country has initiated several policies to strengthen the economy, especially the manufacturing sector, which plays an important role in the development process. The current analysis evaluates the effects of the liberalization initiatives in India on industrial performance. A major branch of the literature has observed that when firms characterized by heterogeneity trade with their foreign counterparts, any change in trade policy will lead to a decrease in the number of firms and a rise in their average size (Melitz, 2003). Considering a dataset of twenty-four manufacturing industries, through the difference-in-difference (DID) estimation method the current empirical analysis illustrates that on average, trade reforms do not lead to an increase in the commodity prices and average size of establishments. In addition, both the real wages and real skilled wages appear to increase in the long run due to liberalization, with potential ramifications.