Competing or Collaborating Siblings? Industrial and Trade Policies in India

Abstract:     
We investigate the link between industrial deregulation, trade reform and unit-level productivity using two unique microeconomic data sets from India. We use disaggregated data on the dismantling of the the "License Raj" in India (operating from the 1950s onwards) and find that removal of microeconomic constraints (that accompanied a license to produce) as well a rise in the threat of potential entry raised output per worker by 8.5%-17%. We also exploit the chronology of reforms in India and find that industries and firms that were de-licensed in the 1980s tend to perform better vis productivity after trade liberalization in 1991. We use an administrative requirement of the "Licensing Raj" to identify the impact of de-licensing - size-based exemption from licensing requirements. This institutional feature provides within industry variation as well as a specification test - we conduct the analysis for hypothetical thresholds (that is, we falsely assign firms to the treatment) and find that there is no size-based response to de-licensing around these artificial thresholds. We also create a psuedo-panel of firms and find that our results are robust to firm-fixed effects.

Keywords: Trade reforms, India, firm-level productivity, industrial licensing, market structure

JEL Classifications: F12, F14, D21, D42, L12, L51, O14, O38, O41

Working Paper Series