Investment Climate and Total Factor Productivity in Manufacturing: Analysis of Indian States

ICRIER Working Paper No. 122 identified a slow deterioration in governance as one of the factors in the inability of the economy to show sustained growth take off after the reform of the early nineties. This paper investigates some of the elements of governance such as red tape and bureaucracy and the functioning of public utility monopolies on economic performance. It does so by first measuring total factor productivity growth across states and over time and then investigating the impact on TFPG of various governance factors that effect the investment climate. It demonstrates rigorously for the first time how poor governance and investment climate in States has low productivity growth and consequently adversely affected overall growth.