Do industrial policy reforms reduce entry barriers? Evidence from Indian manufacturing industries

Abstract

Institutional regulations by licensing and capacity restrictions are often considered as barriers to competition in Indian industry. As most of these regulations have given way to market mechanisms, an increase in the number of entrants is to be expected. This paper attempts to measure the extent of barriers to entry in Indian manufacturing industries by quantifying the height of barriers for 1991/92 and, a decade after the onset of reforms, 2001/02. We find that, contrary to expectations, the height of overall barriers increased. This suggests that dismantling of commands and controls intended to ease entry seems to have paved the way for the erection and strengthening of market barriers to entry.

Keywords:

• economic reforms
• entry barriers
• height of barriers
• market barriers

JEL classification:

• L1
• L11
• L13

Acknowledgements

I thank Stephen Martin and David Audretsch for discussions and Pulapre Balakrishnan, K. Pushpangadan, K.L. Krishna and N.S. Sidharthan for their comments and suggestions. An earlier version was presented at JEI2005, Bilbao, Spain, Centre for Development Studies, Trivandrum, India and Indian Institute of Technology Madras, participants of which I thank for valuable suggestions. Errors, if any, are solely my responsibility.

Notes

1. For a discussion of the market penetration of new entrants see Masson and Shaanan (1986), Yip (1982), Hause and Du Reitz (1984).

2. A discussion of the various components of economic reforms in India and their possible repercussions on the industrial sector is avoided here as a plethora of studies already exists on the issue.

3. See Wallis (1980) and Wickens (1982) for the standard procedure to estimate rational expectation models and Pagan (1984, 1986) on the properties of two‐stage estimators.

4. See Appendix for details on data.

5. The earlier “command and control” regime in India is often referred to as the “license permit raj”.