Total Factor Productivity and Openness in Indian Economy: 1970–2011

Abstract

The present article aims to explore the causal link between total factor productivity (TFP) and openness in the Indian economy during the period 1970–2011. The study employs the cointegration and error-correction approach, along with Granger causality test. The TFP index used in the study is based on the Tornqvist index and export plus import as a percentage of GDP is used as a measure of openness. It is found that trade openness is cointegrated with TFP using the autoregressive distributed lag (ARDL) method. In the short run, there is evidence of unidirectional Granger causality running from trade openness to total factor productivity. The finding suggests that heavy protection for the domestic industry would deprive the country of efficiency gains in the long run. The resultant effect would be the wastage of resources. For a developing country, lower efficiency levels will halt the process of development. However, enhancement of TFP can not only be due to increase in trade, along with it, the investment in human and physical capital are also better avenues to be taken care of. JEL Codes: F10 O40 O33 C22.