Liberalization, Import of Capital Goods, and Industrial Exports: Evidence from Indian Manufacturing Sectors

Abstract

This article examines the impact of capital goods import on Indian manufacturing exports at the sectoral level. Import of capital goods provides dynamic productivity gains through quality, variety, and cost-efficiency channels that further boost manufacturing exports. Since trade liberalization facilitates this process, we presumed that better access to capital inputs would enhance Indian exports for 15 major manufacturing sectors at the 3-digit level from 1997 to 2016. The panel regression analysis based on fixed effect(s) feasible generalized least squares (FGLS), and ordinary least squares (OLS) indicate that, after controlling for world demand, relative export prices, and in-house research and development (R&D), the capital goods import has a positive and statistically significant impact on the aggregate manufacturing sector. The OLS estimates at the sectoral level further confirm the positive impact across nine major sectors. In general, the engineering sectors such as metals, machinery and transport equipment, and traditional labor-intensive sectors like textiles show positive benefit from these technology imports.