Trade Liberalization, Growth and Poverty: Empirical Analysis for India

The study empirically examines the impact of trade liberalization on poverty in India. The relationship between trade liberalization and poverty is not direct and operates via different channels, classified as static (further categorized into households, distribution, factor markets and government) and dynamic (via growth and inequality) impacts of trade openness on poverty. The study analyses the more important, i.e. dynamic effect of trade openness on poverty in India. According to Bourguignon (2003), growth and income distributions have to be studied simultaneously for analysing poverty reduction, depicted by the poverty– growth–inequality (PGI) triangle. The simultaneous equation model of this study builds on poverty–growth–inequality triangle (also known as development triangle) and constructs a system of four equations for trade openness, per capita net state domestic product (PCNSDP), poverty and inequality to be used for the empirical analysis. The model is estimated using panel data methodology on the data collected from NSSO thick survey rounds (1993–94, 2004–05, 2009–10 and 2011–12) for 21 major states of India. The econometric results imply that the trade liberalization process followed in India (which led to growing levels of exports and imports) has helped in raising the per capita income levels in the economy. This has substantially impacted poverty reduction, as it led to fall in the poverty incidence. Further, the results show that consumption inequality (though increasing overtime) is not getting adversely affected by the per capita income or trade openness. Hence, one can say with some confidence that trade openness through its impact on PCNSDP (and no impact on inequality from either trade openness or PCNSDP) would be beneficial for reduction in poverty incidence.