Trade liberalization and the Indian economy

The Economist draws attention to studies by Penny Goldberg, A. Khandelwal, N. Pavcnik and P. Topalova, which explored Indian import data and found clear evidence that the import liberalization boosted output. About the import liberalization in the 1991-97 period that cut average tariffs from 90% to 30%, it writes,

"Imports doubled in value over this period... output grew by over 50% and... cheaper and more accessible imports gave a big boost to India’s domestic industrial growth in the 1990s... It gave Indian manufacturers access to a variety of intermediate and capital goods which had earlier been too expensive. The rise in imports of intermediate goods was much higher, at 227%, than the 90% growth in consumer-goods imports in the 13 years to 2000... cheaper imports may allow firms to produce existing goods using the same inputs as before, but at a lower cost. They could also open up new ways of producing existing goods, and even allow entirely new goods to be made.

... lower import tariffs did lead to an expansion in product variety through access to new inputs. They found that about 66% of the growth in India’s imports of intermediate goods after liberalisation came from goods the country had simply not bought when its trade regime was more restrictive. These new inputs caused the price of intermediate goods to fall by 4.7% per year after 1989. And detailed data linking inputs to final goods showed that the imports led to an explosion in the variety of products made by Indian manufacturers; the average firm made 1.4 products before liberalisation, but by 2003, this had increased to 2.3. The increases in variety were largest for industries where the input tariffs were cut most, and these industries also saw increased spending on research and development. Overall, the new products that Indian companies introduced were responsible for 25% of the growth in the country’s manufacturing output between 1991 and 1997."

About the concerns of cheaper imports flooding the market and driving out domestic producers and even products, the authors find evidence to the contrary. They find little evidence of "creative destruction" or "product dropping".