Economic liberalization and productivity for selected Indian manufacturing industries: a panel cointegration approach

Abstract

This article estimates the long-run production function for a panel of 13Indian manufacturing industries for the period 1981 to 1998. To account for nonstationarity and to avoid spurious regression problems, the panel unit-roots tests as suggested by Im et al. (2003) and the panel cointegration techniques as proposed by Pedroni (1999) were used. The generalized methods of moments (GMM) estimation methodology as suggested by Arellano and Bond (1991) and Blundell and Bond (2000), were used to deal with the simultaneity bias introduced by measurement errors. Based on the panel cointegration test, we found evidence of long-run production relationship for all the selected industries. We also observe increasing returns to scale in 3 out of 13 industries under study. However, comparing the pre- and post-liberalization periods, there are improvements in total factor productivity (TFP) in 9 out of 13 industries in the post-liberalization period of 1991 to 1998. This clearly supports the observations that there are significant economic improvements in the recent Indian economic reforms.