Impact of Trade Liberalization on Indian Textile Firms: A Panel Analysis

Abstract

The textile industry is one of India's major industries in terms of output, investment, and employment. It accounted for 4 % of India's GDP, 14 % of total industrial production, and 11 % of total export earnings in 2012. The industry employs around 45 million people, second only to agriculture. A wide range of textile products are produced and exported from India. Exports of most textile products registered high growth during the 2005-2009 period. The industry and its various subsectors have also experienced a significant reduction in domestic tariff and nontariff barriers over the last decade in addition to liberalization in the global market following the phasing out of the MFA. This chapter examines the impact of India's trade liberalization on firm-level performance in terms of profitability, sales revenues, and imports of raw material for different subsectors of India's textile industry over the 2000-2009 period. It makes use of firm-level panel data from the CMIE−Prowess database to determine this impact. It also analyzes how this impact has been influenced by various firm-specific characteristics. The main finding from this analysis is that there has been an improvement in firm-level profitability and sales and an increase in imported raw materials due to domestic trade liberalization. The analysis also shows that the effect has been stronger through the input sourcing channel, mainly due to the removal of quantitative restrictions on inputs used by the textile industry and that larger firms have been able to gain more from trade liberalization. The analysis and methodology used for the textile industry can be used in similar firm-level studies for other important industries in India.

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