State Business Relations and Manufacturing
Productivity Growth in India
Vinish Kathuria
IIT Mumbai
Rajesh Raj S N
CMDR Dharwad
Kunal Sen
University of Manchester
State Business Relations Regional Workshop
Hyderabad, Bhubaneswar and Kolkotta
Presentation Outline
 Introduction
 Methodology and Data
 Measuring SBR in India
 SBR and State Level Growth
 SBR and Industry Level TFPG
 SBR and Firm Level TFPG
 Conclusions
1. Introduction
 Evidence points to the existence of significant degree of
heterogeneity in productivity across firms even within narrowly
defined manufacturing industries (Bartelsman and Doms, 2000;
Tybout, 2000).
 Several attempts were made to understand the factors
influencing productivity growth
(e.g., the role of trade openness and market structure - Chand &
Sen 2002, Goldar & Kumari, 2003; Ural & Mitra, 2007)
… but failed to identify the role that institutions can play in
influencing industrial performance
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SBR and Manuf Productivity
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1. Introduction contd…
 This paper investigates the role of a
specific set of institutions – effective
state business relations - in explaining
productivity growth across industries.
 Indian mfrg an ideal milieu for the analysis as despite the
dismantling of the License Raj regime and significant
trade liberalization since the 1990s, disparities in
regional performance still persist and convergence of
industrial productivity growth across Indian States has
not happened.
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2. Methodology and Data
• Growth equation estimation: to establish the
relationship between SBR and TFPG
• TFP - the portion of output not explained by the
amount of inputs used in production
• TFPG is computed using Levinsohn and Petrin (LP)
Method which helps to correct the endogeneity bias
• an observable firm characteristic – intermediate inputs
– is used to proxy the unobserved firm productivity
and estimate unbiased production function coefficients
• Organized sector – ASI data for 1994-95, 2000-01 and
2004-05 and Unorganized sector – NSSO Survey data
for 1994-95, 2000-01 and 2005-06
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SBR and Manuf Productivity
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3. Measuring SBR in Indian States
1. How is the private sector organised?
2. How is the public sector organised?
3. Practice of SBRs
4. Presence of Collusive SBRs
Each given equal weight; coded from 0 to 1; and
aggregated to form an overall measure of SBR (which
varies from 0 to 1)
3. Measuring SBR in Indian States contd…
How is the private sector organised?
• Is there an umbrella business association and when did
it come into being?
• Whether the private sector association has a website or
not, and since when? - proxy for quality of
organisational structure and outside visibility
• How frequently the website is updated – efficiency of
internal processes and level of activity
• Is the office of the assoc owned or not? – level of
organisation’s resources
• We look at the main private sector assoc for the state,
and the two leading industry assocs.
3. Measuring SBR in Indian States contd…
How is the public sector organised?
• The presence of state owned or state participated
productive corporations, which are investment
promotion agencies, financial, infrastructure
development and tourism development corporations.
• The governments’ signalling of their relative
priorities through the allocation of public resources
to productive sectors – share of economic services
in total govt expenditures.
3. Measuring SBR in Indian States contd…
How is SBR practised?
• Labour regulation – Labour laws in India are mostly
state-specific, and different states have enacted changes
in labour laws, which are either pro-workers/antibusiness or pro-employer (Tim Besley and Robin
Burgess have coded these changes in laws) – closer
degree of state-business interaction reflects in proemployer labour market regulation
• Stamp duty as a measure of the attitude of the state
governments towards business establishments and their
expansion – tax on transfer of properties and
instruments used in commercial and business
transactions
3. Measuring SBR in Indian States contd…
What are the mechanisms to avoid collusive
behaviour?
• The gross output of firms belonging to delicensed
industries as a proportion of total industrial GDP –
exogenous source of change in the extent of collusive
behaviour at the state level
• Whether the private sector umbrella association has a
regular publication informing its members (and from
when) – captures transparency of organisation’s
activities
• The frequency with which the publication is produced
and distributed – indicates the level of transparency
3. Measuring SBR in Indian States contd…
Figure 1: Evolution of the Effectiveness of State Business Relation measure in Indian States, 1985-2006
Assam
Bihar
Gujarat
Haryana
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttarakhand
West Bengal
.3 .4 .5 .6 .7
.3 .4 .5 .6 .7
.3 .4 .5 .6 .7
SBR index
.3 .4 .5 .6 .7
Andhra Pradesh
1980
1990
2000
2010 1980
1990
2000
2010 1980
Year
Graphs by statenm
1990
2000
2010 1980
1990
2000
2010
4. SBR and State Level Growth
 Dynamic panel data regressions, with 15 states and for the
period, 1985-2004
 Controls: Year-specific national level shocks, e.g. weather
shocks
 State specific effects: innate cultural and geographical
properties of states
 An one per cent increase in the SBR measure leads to a
three per cent increase in long-run growth of Indian states.
 West Bengal’s growth rate would have been appreciably
higher in 1985-2004 if it had a more effective SBR,
especially in the 1980s.
 We also find that strengthening the actual practice of SBRs
(SBR Practice) was the key to SBR’s role in economic
growth rather than the establishment of formal organisations
to carry out such interactions (SBR Public).
5. SBR and Industry Level Growth
 Pooled the data for two distinct time periods – 1994 to 2001 and
2001 to 2006, to see the impact of SBR on TFPG
 Controls: trade and competition policy variables
 Included year and industry dummies
 We find that effective SBR has a direct impact on the TFPG of
the manufacturing sector. The effect is however confined to the
formal manufacturing sector. This supports the existence of
duality in Indian manufacturing.
 It is quite possible that a favourable business climate may be
signaling firms in informal sector to relocate to the states having
good SBR. But once relocated, they may not gain much as the
presence of effective SBR in the state primarily affects the
formal manufacturing sector.
6. SBR and Firm Level Growth
 We also analysed the impact of SBR measure on firm
performance, controlling for size, age, location and nature of
organisation of the firm
 Smaller firms, firms in urban areas, older firms and firms with
simpler organisation structures (less public participation) do
better with better SBR.
 SBR private, practice and collusive components contribute to the
overall impact of effective SBR on firm performance while SBR
public seems to have a negative effect on TFP.
 The study suggests that it is important to improve the quality of
public goods provided by the sub-national state governments
which can further enhance the impact of other sub-components.
7. Conclusion
We find that the formalized institutions involving
state and business affecting productivity of formal
sector may not have much relevance for the informal
sector as such.
Our study shows that collaborative relationships
between the state and the business sector can be
performance enhancing and the goal of policy should
be to strengthen such relationships.
Thank You