Protection to Domestic Industry: An Empirical Investigation

Recently there has been widespread debate on impact of protection on performance of domestic industry. It has been argued that protection to the Indian Industry during the last 40 years has resulted in poor performance of the industry in terms of productivity, technological development, low competitiveness because of poor quality of products at very high prices. Could we not have grown at the same rate as some of the Newly Industrialized Countries (NICs) by following the more open policy towards foreign capital and exports rather than following import-substitution path? This empirical study attempts to answer some of the questions posed above. This study examines the extent of protection to the domestic industry for the period 1974-78 (1970s) and 1982-84 (1980s). International average unit values and domestic prices of the industry are used to find the implicit and effective protection. It also examines the impact of protection on relative performance by using three different performance parameters. To study the distortionary effects on production technology it examines the relationship between protection and physical capital intensity. The main findings of the study are: (i) that protection has increased in the 1980s as compared to 1970s (ii) there is no conclusive evidence about the impact of protection on the performance variables over the two periods (iii) poor performance of Indian exports could not be attributed to the poor price competitiveness of our exports (iv) there is no evidence of distortionary effects of protection on the production technology.