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Has liberalization affected profit margins in Indian Industry?


  • Uma S. Kambhampati
  • Ashok Parikh


In this article, we analyse the determinants of firm-level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980-98, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables - advertising, Research and Development (R&D), capital-output ratios and managerial remuneration - though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected. Copyright Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research, 2005.

Suggested Citation

  • Uma S. Kambhampati & Ashok Parikh, 2005. "Has liberalization affected profit margins in Indian Industry?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(3), pages 273-304, July.
  • Handle: RePEc:bla:buecrs:v:57:y:2005:i:3:p:273-304

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    References listed on IDEAS

    1. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-766, May.
    2. Tuck, L. & Lindert, K., 1996. "From Universal Food Subsidies to a Self-Targeted Program: A Case Study in Tunisian Reform," World Bank - Discussion Papers 351, World Bank.
    3. Peter Lambert & Xavier Ramos, 1997. "Horizontal Inequity and Vertical Redistribution," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(1), pages 25-37, January.
    4. Jean-Yves Duclos & Peter Lambert, "undated". "A Normative Approach to Measuring Classical Horizontal Inequity," Discussion Papers 97/3, Department of Economics, University of York.
    5. Charles Blackorby & David Donaldson, 1984. "Ethical Social Index Numbers and the Measurement of Effective Tax-Benefit Progressivity," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 683-694, November.
    6. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
    7. Jenkins, Stephen P & Lambert, Peter J, 1997. "Three 'I's of Poverty Curves, with an Analysis of UK Poverty Trends," Oxford Economic Papers, Oxford University Press, vol. 49(3), pages 317-327, July.
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    Cited by:

    1. Barua, Alokesh & Chakraborty, Debashis & Hariprasad, C. G., 2010. "Entry, Competitiveness and Exports: Evidence from Firm Level Data of Indian Manufacturing," MPRA Paper 22738, University Library of Munich, Germany.
    2. Basant, Rakesh & Mishra, Pulak, 2017. "Vertical Integration, Market Structure and Competition Policy: Experiences of Indian Manufacturing Sector during the Post Reform Period," IIMA Working Papers WP 2017-09-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Alokesh Barua & Debashis Chakraborty & Hariprasad CG, 2012. "Entry, Competitiveness and Exports: Evidence from the Indian Firm Data," Journal of Industry, Competition and Trade, Springer, vol. 12(3), pages 325-347, September.
    4. Kambhampati, Uma S. & Kattuman, Paul A., 2009. "Growth responses to competitive shocks: Market structure dynamics under liberalisation," Structural Change and Economic Dynamics, Elsevier, vol. 20(2), pages 114-125, June.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology


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