Manufacturing Productivity in Indian States

This paper analyses the influence of the investment climate on total factor productivity in the registered manufacturing sector across the major Indian states. We find that a market friendly investment climate is important for achieving higher levels of productivity. This conclusion is robust, unaffected by the choice of the investment climate indicator. A market friendly investment climate, however, does not mean that the regulatory function of the government should be done away with. Government regulation is crucial to address market failures and to protect social interests, but the policies and practices of the governments should be transparent and designed without distorting the incentives of the firms to invest and grow