ISSN 2348-1218 (print) International Journal of Interdisciplinary Research and Innovations ISSN 2348-1226 (online) Vol. 9, Issue 2, pp: (148-156), Month: April - June 2021, Available at: www.researchpublish.com
Influence of Exchange Rate Fluctuations on the Growth Rate of Productivity in the Indian Manufacturing Sector - An Empirical Analysis 1
Dr. Nilesh Pandya, 2Tejas Joshi
Abstract: It is frequently argued that exchange rate movements can impact productivity. Balassa (1964) and Samuelson (1964) have shown that real exchange rate will appreciate in countries where productivity growth is faster compared to the rest of the world. However, for developing countries one cannot generalize the hypothesis that a real appreciation of one currency will positively impact productivity. The present study estimates productivity growth in Indian organized manufacturing industries with more up to date and comprehensive data for the manufacturing sector of the economy. Tornqvist Productivity Index technique is used to compute total factor productivity and thereafter find total factor productivity growth. Multi-variate regression model is tested between individual industry productivity growth and independent variables. Keywords: real exchange rate, Index technique, Growth Rate, Indian Manufacturing Sector.
1. INTRODUCTION “Movement of productivity” has been both curiosity and concern for development economists and policy makers. The realization of productivity growth in the industrial sector continues to drive the overall economic performance of the Indian economy. The Indian economy has witnessed more than two decades of wide ranging economic liberalization surrounding many sectors. In order to make India’s industrial sectors; both, internally efficient and globally competitive, liberalization of international trade and industrial policies was endeavored. Encouraging results have been seen in the industrial productivity performance; from a turnaround in the mid-1980s to improved performance in the 1990s (Ahluwalia, 1991). Before the trade liberalization policies of 1991, Indian industries failed to compete in the global market due to uneven resource allocation by government policies such as high custom tariff rates, domestic trade tax and excise duty structure, reservation of production etc. The relationship between trade policy and economic performance is one of the oldest controversies in economic development. The phase of industrialization starting after Indian Government’s 1991 policy of trade liberalization; has changed the situation, slowly boosting productivity. In order to make the Indian industrial sector a strong competitor in the international market, various positive alterations have been made in technology-import policy and foreign direct investment policy. The liberalization of import policy has been accompanied by a substantial depreciation of the exchange rate. The nominal exchange rate depreciated by about 50 per cent between 1990 and 1995 and the real effective exchange rate depreciated by about 24 per cent in this period. The depreciation of exchange rate made imported manufactured goods costlier. It neutralized to some extent the potential effects of lowering of tariff rates and relaxation of quantitative restrictions on imports. There are two mechanism of movements in the exchange rate can have an impact on productivity, one mechanism which focuses on demand side effects, often referred to as the competitiveness1 approach, emphasizes the export growth impact of exchange rate depreciation and the productivity consequences of that growth. Another heterodox 1
OECD defines competitiveness as the degree to which a nation can, under free trade and fair market conditions, produce goods and services, which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long-term.
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