large firms have not had difficulty raising external finance. However, the report also notes that, bank lending to the private sector has hardly increased over the same period. This has partly to do with India’s huge fiscal deficits. It is partly because the banking sector remains to be predominantly state-owned and heavily regulated. What this means is that small business access to finance may not have improved significantly over the years since, unlike large firms, SMEs in India are not yet attractive to equity markets or to FDI.

In this paper we analyze enterprise level data from the 2002 and 2005 waves of the Firm Analysis and Competitiveness Survey of India (FACS survey-henceforth) of the World Bank and the Confederation of Indian industry in order to help quantify the effect of all four factors, namely, labor regulation, power shortages, access to finance and corruption on manufacturing growth in India. As we have pointed out already, there is considerable business survey evidence that labor regulation and power shortages are powerful influences on regional differences in industrial growth within India as well as on the growth of Indian industry relative to international comparators. However, we are not aware of similar investigations of the role of the other two factors. How important are corruption and access to finance as influences in manufacturing growth compared to labor regulation or power shortages? How much of the regional gap in industrial growth within India does each of the four factors account for?

We seek to address these questions by estimating a dynamic annual sales growth equation at the enterprise level on the FACS survey dataset for industrially advanced and lagging regions separately, as well as on the all-India sample, with business environment indicators among the right hand side variables. In specifying the equation we have made use of the hierarchy that Acemoglu and Johnson (2005) establish between what they call ‘property rights institutions’ and ‘contracting institutions’ as influences on long run economic growth. Property rights institutions provide private agents protection from predation by the state or powerful elites, while contacting institution regulate contracts between private parties. Acemoglu and Johnson argue and offer evidence that property institutions exert stronger influence on long term economic outcomes than contracting institutions. The reason that they give for this is that private agents usually get around the problem of poor contracting institutions by developing informal substitutes for them albeit at a possible cost. On the other hand, there is little they could do to counter predatory exercise of political power and therefore withdraw entirely from activities or transactions that they would have undertaken under secure property rights. In other words, the economic outcomes of the failure of contracting institutions tend to be less extreme than those of the failure of property rights institutions.

Following the contribution of Fernandes and Kraay to World Bank (2006b), we will think of corruption as a proxy for the quality of property rights institutions. As Fernandes and Kraay (2006) argue, corruption is ultimately the use of political authority in order to make private economic gain (in the form bribes). Its incidence should therefore be higher where property rights institutions are weaker. On the other hand we treat labor regulation, 3