India's trade policy reforms and industry competitiveness in the 1980s

The main purpose of this paper is to measure and analyse the competitiveness of Indian manufacturing industries during the 1980s by focusing on the sources of competitive advantage. Two types of sources are distinguished: first the real sources of competitiveness such as factor productivity and factor abundance, which give rise to comparative advantage, and second, various price distortions of products and factors of production, which may either enhance or diminish competitiveness. Since many of these distortions are policy-induced, the analysis amounts to the measurement of comparative advantage combined with a quantification of the impact of policies and other factors on competitiveness. The paper proceeds by sketching, in Section 2, the policy environment facing Indian industries and its changes during the study period (the 1980s). In Section 3, we explain the concept of competitiveness and its relationship to comparative advantage, and propose an indicator and research procedure that allow us to identify the major sources of comparative and competitive advantage. The method is adjusted here to the data set available. Since the data are taken from India's 'Annual Survey of Industries' and are limited in the number of variables, we cannot make full use of the method, which works best when it is applied to firm-level micro data. The findings of this analysis are reported in Section 4, where they are also compared with the findings of other studies of industry competitiveness in India. Some policy conclusions are drawn for future trade and industrial policy reforms.