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Trade Liberalization, Growth and Poverty: Empirical Analysis for India

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Abstract

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.

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Notes

  1. 1.

    Natural logs of all variables are taken.

  2. 2.

    One way is to proxy it by taking capital expenditure of the government which will at least substitute for public investment, as there is no measure available for private investment. But it has been dropped from this equation due to high correlation with per capita government expenditure leading to the problem of multicollinearity.

  3. 3.

    Three new states were formed in the year 2000, namely Chhattisgarh, Jharkhand and Uttaranchal. The new boundaries of the states are taken to maintain consistency across years, and data for the newly formed states are constructed accordingly (data adjustment done for Madhya Pradesh, Bihar and Uttar Pradesh, respectively) for period prior to the year 2000.

  4. 4.

    There is a general consensus in literature that the estimates based on the 55th NSSO round are biased downwards due to a change in methodology of collecting data on household consumption expenditure (Datt & Ravallion, 2002). However, there is no agreement yet on the extent to which poverty has been underestimated.

  5. 5.

    The methodology to calculate exports and imports of the states is adopted from author’s another study, Dhamija (2019), and is reproduced here for ease of understanding.

  6. 6.

    Barua and Chakraborty (2010) used the population share of state as weights, in place of GSDP share as weights, used here. They based it on the assumption of homothetic preference for imports across all states. However, according to the macroeconomic theory, imports are a positive function of income. The studies have also largely linked magnitude of imports to the size of the economy (Kumar, 2001).

  7. 7.

    Sampling weights are used to derive population level for these variables.

  8. 8.

    Same as above.

  9. 9.

    The same approach of taking capital outlay as a proxy for investment at the state level has been followed by Bathla et al. (2015) and Nayyar (2008).

  10. 10.

    The results of fixed effects and random effects specifications of each equation are not given in the paper but are available on request. The choice between the two specifications is based on Hausman test and Mundlak formulation (Greene, 2012). The Mundlak formulation is given preference over Hausman test wherever contradictory results emerge. This is because the test statistic of Mundlak formulation is based on robust covariance matrix estimator, while Hausman test statistic is based on non-robust covariance matrix estimator.

  11. 11.

    The results of FE and RE specifications along with Hausman test to choose final model for each equation are given in Appendix 1.

  12. 12.

    Note that this calculation of the impact of trade openness on poverty can only be taken as impact effects including both indirect channels into account (as there is no direct channel of effect in the model) but omitting the feedback effect from PCNSDP (as this omits the feedback effect from PCNSDP to trade and from PCNSDP to inequality).

  13. 13.

    Frankel and Romer (1999), in their cross-section study of 150 countries for the year 1985, found the similar pattern in OLS and IV estimates of the coefficient of trade openness on per capita income. Irwin and Tervio (2002) also checked for the consistency of results of Frankel and Romer (1999) and found that instrumenting trade openness led to higher positive effect of trade openness on per capita income. However, they stated that this implied that either trade openness was not measured correctly and/or it was not a good proxy for other factors that increased income due to interactions between nations.

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Author information

Authors and Affiliations

  1. Indian Institute of Foreign Trade (IIFT), Delhi, India

    M. Pant

  2. Hindu College, University of Delhi, Delhi, India

    N. Dhamija

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  1. M. Pant
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Correspondence to N. Dhamija .

Editor information

Editors and Affiliations

  1. Department of Management, Indian Institute of Foreign Trade, New Delhi, Delhi, India

    Pooja Lakhanpal

  2. Department of Economics, Indian Institute of Foreign Trade, New Delhi, Delhi, India

    Jaydeep Mukherjee

  3. Department of Economics, Indian Institute of Foreign Trade, New Delhi, Delhi, India

    Biswajit Nag

  4. Department of Economics, Indian Institute of Foreign Trade, New Delhi, Delhi, India

    Divya Tuteja

Appendix 1

Appendix 1

See (Tables 4, 5, 6 and 7)

Table 4 Panel data 2SLS estimates—poverty equation
Full size table
Table 5 Panel data 2SLS estimates—income equation
Full size table
Table 6 Panel data 2SLS estimates—trade openness equation
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Table 7 Panel data 2SLS estimates—inequality equation
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Pant, M., Dhamija, N. (2021). Trade Liberalization, Growth and Poverty: Empirical Analysis for India. In: Lakhanpal, P., Mukherjee, J., Nag, B., Tuteja, D. (eds) Trade, Investment and Economic Growth. Springer, Singapore. https://doi.org/10.1007/978-981-33-6973-3_15

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