S N esh Raj

State business relations and manufacturing productivity growth in India

Empirical studies on total factor productivity growth (TFPG) in developing countries highlight trade open-ness, research and development and market structure as being the most important determinants of TFPG. The role of institutions remains overlooked in the literature on the determinants of TFPG. In this paper, we look into the role of institutional quality as captured by effective state-business relationships (SBRs) in influencing TFPG, using Indian manufacturing as a case-study. By SBRs we mean a set of highly institutionalised, responsive and public interactions between the state and the business sector. To compute TFPG, we use firm level data for both the formal and informal manufacturing sector. We correct for the simultaneity bias associated with the production function approach for TFPG estimation by employing a method developed by Levinsohn and Petrin. We propose measures of effective SBRs for 15 Indian States over the period 1994-2005, and then use them in TFP growth equations to estimate the effect of SBR on TFPG. The results indicate that SBR has positively affected the TFP growth of Indian industry. The effect however is primarily for the formal sector.

Rain, Rain, Go Away? The Investment Climate, State Business Relations and Firm Performance in India

It is commonly argued that a better investment climate reform – i.e., lower distortions in the institutional, policy and regulatory environment in which firms operate – lead to discernible improvements in firm performance. In this paper, we argue that effective State–Business Relations (SBRs) condition better investment climate outcomes and that the deeper institutional determinants of firm performance are the former. We examine the effect of effective SBRs of Total Factor Productivity (TFP) for formal sector firms in India for the years 2000–2001 and 2004–2005 and find support for this hypothesis.

Do Informal Sector Wages Explain Rural Poverty? Evidence from India

ABSTRACT This article examines the relationship between incidence of poverty and reliance on informal sector by workers in rural areas. The authors find that higher incidence poverty in rural areas can be explained to a certain extent by low wages in the sector, once we control for urbanization and other factors. Given the small size of formal sector and its substantially lower employment elasticity, the scope for expansion of employment in this sector is limited. The article concludes that elimination of rural poverty demands improving the condition of workers in the informal sector, which rests on paying minimum wages besides imparting skills.

Institution of State–Business Relation and Its Impact on Manufacturing Productivity Growth in India: A Post-reform Analysis

Empirical studies on total factor productivity growth (TFPG) in developing countries highlight trade openness, research and development and market structure as being the most important determinants of TFPG. The role of institutions remains overlooked in the literature on the determinants of TFPG. In this article, we look into the role of institutional quality as captured by effective state–business relationships (SBRs) in influencing TFPG, using Indian manufacturing as a case study. By SBRs we mean a set of highly institutionalized, responsive and public interactions between the state and the business sector. To compute TFPG, we use firm level data for both the formal and informal manufacturing sectors. We correct for the simultaneity bias associated with the production function approach for TFPG estimation by employing a method developed by Levinsohn and Petrin. We propose measures of effective SBRs for 15 Indian states over the period 1994–2005, and then use them in TFPG equations to estimate the effect of SBR on TFPG. The results indicate that SBR has positively affected the TFPG of Indian industry. The effect, however, is primarily for the formal sector.

Does Institutional Quality Matter for Firm Performance? Evidence from India

How does institutional quality affect firm performance? We examine the effect of various measures of institutions on firm productivity, using a rich micro level data on manufacturing enterprises in India drawn from the Enterprise Surveys of the World Bank. Our results suggest that bureaucratic corruption negatively influences firm productivity. In contrast, other institutional variables seem to have less influence on firm performance. This suggests that the focus of the Indian government needs to be redirected to address the corrupt practices at various levels rather than focusing just on improving the measures of doing business.

Impact of Foreign Trade on Employment and Wages in Indian Manufacturing

This study attempts to investigate the impact of international trade on the manufacturing employment and wages in India over the period 1980–2005. Given India’s abundant labour force, the empirical evidence will provide an indication on the role of trade openness in labour market in terms of employment and wages. We employ three standard modelling approaches, namely, factor content, growth decomposition and panel data modelling approaches, to verify the role of trade on employment and wages. We use panel data at the industry level obtained from Annual Survey of Industries (ASI) and World Bank trade data set. Our results suggest that international trade has not had any significant impact on employment generation in the manufacturing sector in India. While there is little evidence on any significant effect of export orientation on employment, import penetration had a detrimental effect on employment generation.

Do Effective State Business Relations matter for Firm Performance? A Study of Indian Manufacturing

This paper examines the role of the external institutional environment captured by effective state–business relations (SBRs) on firm performance. By effective SBRs, we mean a set of highly institutionalised, responsive and public interactions between the state and the business sector. We find that effective SBRs have had a discernible positive impact on firm productivity in Indian formal manufacturing over the period 1989–1990 to 2004–2005. We also find internal and external institutional factors are complementary to firm performance – smaller firms, firms in urban areas and firms in simpler organisational forms benefit more.

Theme: Macro and micro dimensions of manufacturing performance in India

In 1991, the Indian economy underwent major economic reforms, after several decades of following an inward looking development strategy. The 1991 reforms were specifically targeted to the manufacturing sector due to the realisation that the sector offered much greater prospects for capital accumulation, technical change and linkages and hence job creation, especially for the semi-skilled and poorly educated segment of the labour force, which comprises most of India’s working poor. The reforms in respect of the industrial sector were intended to free the sector from barriers to entry and from other restrictions to expansion, diversification and modification, so as to place the industrial sector on a higher growth path. Given the main objective of reforms was to improve industrial performance, it is important to examine how far the reforms have contributed in enhancing the performance of the Indian manufacturing sector. The objective of this theme issue is to shed some light on this aspect and to showcase some of the latest research on manufacturing performance especially after the introduction of reforms. This theme issue resulted from a workshop organised at the Indian Institute of Technology Bombay (India) in March 2011 titled ‘Economic reforms and the evolution of productivity in Indian manufacturing’. The workshop was sponsored by the Economic and Social Science Research Council, United Kingdom. This theme issue contains three papers. The first paper by Mitra and Goldar examines the performance of enterprises in the formal and informal manufacturing sectors by comparing the technical efficiency estimates derived using the data envelopment analysis. While maintaining that formal sector establishments performed better than the informal sector units, the paper finds that the latter failed to derive benefits from the process of economic growth. The paper argues that the informal sector enterprises exist only to provide means of survival, and they seem to lack dynamism. The second paper by Kathuria, Raj and Sen examines the role of the external institutional environment captured by effective state-business relations on the performance of formal firms in India using Annual Survey of Industries plant level data. The paper finds that effective state–business relations have had a discernible positive impact on firm productivity. The paper also suggests that both internal and external institutional factors matter for firm performance and the effects of external and internal institutional determinants on firm performance are strongly complementary. The last paper by Thomas argues that the growth of Indian manufacturing during the post 1991 years is characterised by ‘joblessness’. The paper claims that there is thin empirical evidence for the frequently cited argument that the major barrier to manufacturingemployment growth in India is the ‘rigidity’ in the country’s labour regulations. According to the study, power shortages, insufficient availability of credit and the volatility in exchange