all the dimensions considered. The difference between the two groups is particularly striking for access to land, for which there is an almost six-fold increase in the likelihood of encountering difficulties when moving from column 1 to Column 2, and for business licensing, where the percentage of firms lamenting problems grows by a factor of around 3.5. Similarly, in Table 6.3, firms in States with weaker governance tend to report a higher incidence of harassment and less-than-impartial behaviors on the part of public officials. It is interesting to notice, for example, that while the likelihood to be visited by a tax inspector, as well as the number of visits per year, does not differ substantially between the two groups of States (if anything, a firm is more likely to receive a visit in a high-governance State), the likelihood that an informal gift to the inspector is expected during one such visit more than triples in size in the low governance group, where this seems to be the case for a quarter of the respondents.

In Figure 6.1, we further show that, as governance quality deteriorates, various indicators of economic efficiency and investment climate produced by the Indian National Council of Applied Economic Research (NCAER, 2017) worsen too.<sup>46</sup> For example, land issues become more problematic in general, in particular with less land available for industrial purposes as a share of total surface area of the state, lower digitization of land registration processes, and a higher share of entrepreneurial projects that are stalled because of landrelated problems vis-à-vis other reasons. Labor issues display a similar pattern, and, interestingly, the share of contract workers in the total labor force is also higher in worse-governance States. As regards other areas of interest, financial depth (measured as the ratio of outstanding commercial bank credit and gross State GDP) decreases with institutional quality, as does (albeit mildly) the completion rate of legal cases by courts; finally, higher shares of entrepreneurial projects are delayed by environmental clearances.

# 6.1 The dynamics of governance: Is there convergence across states?

Given our focus on time trends, we would be ideally interested in providing at least some evidence on the evolution of governance patterns across Indian States over time. Since we do not have data on the governance score by Transparency International India and CMS for years other than 2005, we try to do so by exploring a range of additional sources. First, we use an indicator of State government effectiveness in the delivery of core public services as developed by Mundle et al. (2016), who focus on infrastructure, social services, fiscal performance, justice, law and order, and quality of the legislature. Then, we turn to another work by the Centre for Media Studies (2017) and borrow their statistics on the proportion of households who were forced to pay bribes in order to obtain public services. Finally, we consult the yearly reports by the Indian National Crime Records Bureau, and retrieve the number of corruption records to be investigated by the Anti-Corruption and Vigilance Departments of each State (both as a stock and as the number of new cases reported each year).

The exercise delivers two stylized facts: (i) governance is sticky; and (ii) there nonetheless seems to be convergence in governance. In other words, it seems that states that did not have robust governance capabilities might be effectively catching up with the rest of the country, despite still displaying worse outcomes overall.

> 46 The NCAER study assesses the factors creating investment opportunities and driving investment decisions in Indian states, including the availability of factors of production, the efficiency in the use of these productive factors, States’ growth prospects, and firms’ perceptions of investment opportunities as created by the socio-political and economic climate. NCAER started producing their State Investment Potential reports only in 2016, and their first edition did not feature information on land issues. For this reason, we only focus on the 2017 wave of the study.

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