Trade liberalization, market discipline and productivity growth: new evidence from India

This paper investigates the effects on competition and productivity of the dramatic 1991 trade liberalization in India. Using firm-level data from a variety of industries, we find strong evidence of an increase in competition (as reflected in the reductions in price-marginal cost markups) and some evidence of an increase in the growth rate of productivity. The methodological framework differs from earlier studies in that we 'allow' for returns to scale to change after the liberation, a relaxation of estimation restrictions that improves our estimates allowing more accurate (partial equilibrium) computation of welfare changes. Welfare analysis using the estimated parameters mostly suggests an increase in welfare, albeit quite small, in the sectors analyzed.