Import penetration and capacity utilization in Indian industries Bishwanath

Import penetration and capacity utilization in Indian industries Bishwanath

Published Jan 2008

Authors

B. Goldar, V.S. Renganathan

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Liberalization of imports of manufactures in India led to a significant increase in import penetration between 1991 and 1998. This trend was reversed subsequently, and there was a slight decrease in import penetration between 1998 and 2003. The fact that tariff rates on imports of manufactures were not reduced in the period 1998-2003 must have helped in arresting the increase in import penetration. Scholars have noted that the lifting of quantitative restriction on about 1400 items (6-digit HS) in 2000/2001 did not lead to any large-scale across-the-board increase in the imports of such products.

The paper analyses trends in import penetration and capacity utilization in Indian industries in the post-reform period. The paper attempts to econometrically assess the impact of import penetration on capacity utilization in Indian industrial firms using a dataset covering 62 industrial firms for a period of eight years, 1996-97 to 2003-04. The selected firms belong to industries that encountered significant import penetration during 1996-2003.

The analysis of trends reveals that a liberalization of imports of manufactures led to a significant increase in import penetration between 1991 and 1998, which was followed by a slight decrease in import penetration between 1998 and 2003. Estimates of capacity utilization presented in the paper show that capacity utilization in organized manufacturing fell between 1995 and 2001, but rose between 2001 and 2004.

Firm-level analysis of the determinants of capacity utilization, based on cross-sectional regression and estimates of a dynamic model, reveals that capacity utilization is positively related to size of the firm, market share and market concentration. There are indications from the econometric results that while import penetration may have a short-term adverse effect on capacity utilization in industries, over time firms are able to make adjustments and thus contain, and even neutralize, the adverse effect.

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