In this study, we look into the role of institutional quality as captured by effective state-business relationships (SBRs) in influencing sectoral productivity in India. We use the measures of effective SBRs developed by Cali, Mitra and Purohit (2009) for 15 Indian States over the period 1994-2005. For the study, we use unit level data for both the organised and unorganised manufacturing sector. To correct the endogeneity bias associated with the production function estimation, we employ a method recently developed by Levinsohn and Petrin. The total factor productivity growth estimates, as obtained from the production function, are then used to see the effect of SBRs. The results indicate that SBRs have positively affected the total factor productivity growth of Indian industry. The effect however is primarily for the organised manufacturing sector.
Discussion Paper Series, Research Programme Consortium for Improving Institutions for Pro-Poor Growth, Manchester, UK, No. 33, 39 pp.