Imported Intermediate Inputs and Domestic Product Growth: Evidence from India

New goods play a central role in many trade and growth models. We use detailed trade and firm-level data from a large developing economy-India-to investigate the relationship between declines in trade costs, the imports of intermediate inputs and domestic firm product scope. We estimate substantial static gains from trade through access to new imported inputs. Accounting for new imported varieties lowers the import price index for intermediate goods on average by an additional 4.7 percent per year relative to conventional gains through lower prices of existing imports. Moreover, we find that lower input tariffs account on average for 31 percent of the new products introduced by domestic firms, which implies…