Abstract
The growth of India's manufacturing sector since 1991 has been attributed mostly to trade liberalization and more permissive industrial licensing. This paper demonstrates the significant impact of a neglected factor: India's policy reforms in services. The authors examine the link between those reforms and the productivity of manufacturing firms using panel data for about 4,000 Indian firms from1993 to 2005. They find that banking, telecommunications, insurance and transport reforms all had significant, positive effects on the productivity of manufacturing firms. Services reforms benefited both foreign and locally-owned manufacturing firms, but the effects on foreign firms tended to be stronger. A one-standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises.
Highlights
A vital element of India‟s rapid economic growth since the early 1990s has been the improved performance of its manufacturing sector
We find that the aggregate services index has a positive and highly significant coefficient estimate, suggesting a strong role for services liberalization in explaining manufacturing firm productivity in India
This paper suggests that previous explanations for the post-1991 growth of India‟s manufacturing sector have ignored an important factor: the contribution of India‟s policy reforms in services
Summary
A vital element of India‟s rapid economic growth since the early 1990s has been the improved performance of its manufacturing sector. Previous explanations for the revival of manufacturing emphasize trade liberalization, more permissive industrial licensing policies, and the limited labor market reforms undertaken since 1991 (see review below). In focusing primarily on proximate policies, previous analyses have ignored what we demonstrate is a critical factor, policy reforms in services sectors. Reforms in the 1990s, allowing greater foreign and domestic competition with greatly improved regulation, have visibly transformed these services sectors.. Indian firms are no longer at the mercy of inefficient public monopolies, but can source from a wide range of domestic and foreign private sector providers operating in an increasingly competitive environment. Available evidence suggests that firms today have access to better, newer and more diverse business services
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