Trade Liberalization and Indian Manufacturing MSMEs: Role of Firm Characteristics and Channel of Liberalization

Abstract

We examine the impact of tariff and non-tariff reductions on firm-level gross value of output (GVO) and productivity for various types of Indian manufacturing MSMEs for the 2002–2007 period. We merge the 3rd (2001–2002) and 4th (2006–2007) All India Census data on Indian MSMEs to create a novel dataset that includes micro-enterprises and to calculate input and final goods tariffs, ERPs and NTBs for broad product groups using information from India’s export–import policy, 1997–2003 and 2004–2009. After controlling for firm, industry, state and time-specific factors, we find tariff reductions have improved firm-level GVO and productivity for MSMEs which are technologically upgraded and quality certified. Further, the effects of input tariff reduction exceed those from final goods tariff reductions, i.e., the input sourcing channel is stronger than the final product competition channel. Liberalization of non-tariff barriers is found to have a positive effect on both GVO and productivity growth.