Role of trade policies in growth of Indian manufacturing sector

Abstract: Indian manufacturing sector witnessed an unprecedented growth in the decade of 2000. Not only did the average annual growth touch 8%, there was a stupendous rise in growth of real exports and real imports of manufactures in this decade. This is also the decade when the average annual growth of real per capita income was the highest (5.6%). In this scenario, the paper examines three issues: firstly, the role played by trade polices and reforms in the growth of the manufacturing sector. Secondly, whether this growth was an export-led growth? And thirdly, what are the successful stories at the industry level. Structural breaks are identified in growth rate of manufacturing sector and growth rates of real exports and real imports using Additive Outliers (AO) and Innovative Outliers (IO) tests. The results show that the reforms of 1991 played a more crucial role than the reforms of 1980s in causing structural break in overall manufacturing growth. Changes in export and import policies which were brought about in 2001 and 2002 led to structural breaks in real exports and real imports of the sector. Time series analysis is undertaken and Vector Error Correction model is estimated using two different specifications to test whether manufacturing growth is an export-led growth or not. Granger causality tests are undertaken to check the causality. The results show that growth of Indian manufacturing sector is not an export-led growth but has been induced by domestic demand and import growth. Motor vehicles and food and food products industries are identified as successful stories with respect to growth in value added and growth in trade while electrical machinery and, chemicals and chemical products with some others are identified as industries which need to be closely monitored as they may have the danger of possible hollowing out