Does trade openness affect manufacturing growth at the Indian state level?

On the whole, manufacturing growth in India failed to accelerate in spite of widespread trade reforms undertaken since the early 1990s. However, the picture is mixed if we look at the sub-national level. This paper attempts to examine the determinants of manufacturing performance at the state-level in a panel model framework for the time period 1988-2007. One aspect, which makes this paper distinct from other empirical exercises in this field, is the consideration of trade openness of the states as one of the determinants of manufacturing performance in addition to the other usual control variables such as infrastructure, access to credit, human capital and labour market environment. Data on trade is not available at the Indian state level. We therefore construct two proxies for trade openness, one relating to exports volume and the other related to tariff barriers, for the Indian states in our sample. In line with the conventional view, trade barriers have a negative impact on manufacturing growth whereas trade volumes have a positive impact. However, openness has no impact on registered manufacturing in India. We argue that it is the flexibility of the unregistered sector (due to lack of rigid labour laws) which helps it take advantage of trade openness.