Import Penetration And Price-Cost Margins In Indian Manufacturing Industries

An econometric analysis of the impact of import liberalization on price-cost margins in Indian industries in the post-reform period is carried out using firm-level data for eight manufacturing industries for the period 1991-92 through 2001-02. Price-cost margins are regressed on refined measures of import competition and some other explanatory variables. The results show a negative effect of import penetration on the profitability of Indian manufacturing firms in the 1990s. On the basis of the econometric results, together with the observed upward trends of import penetration ratios during the period, the paper concludes that the trade liberalization since 1991 in India has decreased the profitability of domestic firms. Moreover, we show that the profit reducing effect of import penetration is smaller for firms with larger market shares. This result is in contrast with earlier empirical studies, but in line with the recent theoretical work (e.g., Melitz, 2003).