‘quadrant-II states’) capture the middle ground in terms of productivity. Business growth rates are also much higher in high-growth states than in low-growth rates. The paper has shown that, although these patterns in business performance rates do not map neatly into a pattern whereby the better performing states are also better in every important aspect of their business environment. It remains to be the case that low-income, low-growth states have the worst indicators of all institutional variables except for labor regulation. Corruption appears to be most prevalent in those states while the cost of power outage and poorer access to finance are also highest for the same group of states.

In order to assess the role of the four institutional variables in the performance gaps between the four groups of states, we have estimated a dynamic business growth equation for each group of states on the FACS survey sample. Our estimates show that excessive labor regulation, power shortages and problems of access to finance are all significant influences on industrial growth in India. The average business growth rate is lower where labor regulation is greater, power shortages are more severe, and financial constraints stronger. We also find that the effect of each of the three factors on business growth depends on the incidence of corruption. Specifically, labor regulation affects the growth only of enterprises for which corruption is not of any concern in business decisions. On the other hand, power shortages are a drag on the growth only of enterprises selfreportedly held back by corruption. Lastly, sales growth is constrained by cash-flow only in businesses that are not affected by labor regulation, power shortages or corruption. We have interpreted this as indication that corruption is a proxy for something more fundamental than the payments of bribes, namely, the quality of ‘property rights institutions’ in the sense of Acemoglu and Johnson (2005). On the other hand, our indicators of labor regulation and access to finance gauge the quality of ‘contracting institutions’. The positive association between the growth impact and power shortages can be explained by the fact that there is a property rights dimension to power shortages in India. Our findings on the interaction between corruption and other three institutional variables is therefore consistent with the Acemoglu-Johnson view that the quality of property rights institutions exerts more abiding influence on economic outcomes than the quality of contracting institutions. Further, our findings suggest that there might also be a hierarchy among contracting institutions as influences on growth. Specifically, it looks that employment contract institutions dominate over financial institutions in as far as access to finance constrains the growth only of businesses unaffected by labor regulation.

# **_References_**

Acemoglu, D. and S. Johnson. 2005. ‘Unbundling Institutions,’ _Journal of Political Economy_ , 113 (5), pp. 949-995.

Arellano, M., and S. Bond. 1991. ‘Some Tests of Specification for Panel Data: Monte Carlo Evidence and Applications to Employment Equations,’ _Review of Economic Studies_ ,58, pp.277-297.

Blinder, A. S. 1973. “Wage Discrimination: Reduced Form and Structural Estimates,” _Journal of Human Resources_ , 8, pp. 436-455.

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