Adjustment of Indian manufacturing firms to pro-market economic liberalizing reforms, 1988 - 2006: A Time-Varying Panel Smooth Transition Regression (TV-PSTR) approach

This paper for the first time employs the Time Varying Panel Smooth Transition Regression (TV-PSTR) approach to model the dynamic adjustments of firms and the evolution of India's industrial structure in the bigger setting of decades against the backdrop of India's unexpected dramatic liberalizing reform starting from 1991, using Indian manufacturing firm data. It finds that the transition of market structure and productivity after liberalization do follow a smooth transition process. Instead of the previously assumed instantaneous 'big-bang' shift just after reforms, it actually took years for the Indian manufacturing industries start to react to the reforms, and the transitional impact of reforms took approximately four to eight years to complete. There is strong evidence of increased competition, which reduces the markup and make welfare gains possible from the reduction of dead weight losses. Except for the Leather and Chemical industries, RTS in most industries shrink after the transition. The effects of reforms on total factor productivity (TFP) are mixed: most import-competing industries, which suffer most from the shrinking of market size experienced no change or decreasing TFP growth; whereas the exportoriented industry, as the industry which benefit most from economy of scale, enjoyed a huge TFP growth following the reforms.