changes happen at the industry level over time, they should be adequately captured by the inclusion of industry-year fixed effects in our baseline regressions. In our robustness exercises, therefore, we control for a set of industry-year interaction dummies, and obtain very similar trends as in our main specifications, regardless of whether sectors are identified at the two- or three-digit level.<sup>21</sup> A potential confounder to the interpretation of our analysis could be related to selection bias as firms enter and exit the market in response to unrelated changes in the business environment. For example, distortions may result spuriously high both in states that are growing rapidly and have many entrants who have not yet reached productive efficiency, _and_ in less well-off states that have a high share of struggling and exiting firms – but this would obviously have very different policy implications in the two cases. To deal with this concern, we first exploit information in the ASI data on the reasons why an establishment in the sample frame could not be included in the survey, in order to get some information on firm closures.<sup>22</sup> Annex Table A5.1 shows that in our sample period there was indeed quite a high turnover of firms, but that the difference between the firm exit rates of high- and low-growth states does not seem to be substantial, nor to follow a defined pattern over time. In Annex Table A5.2, we also document firm entry,<sup>23</sup> which turns out to be equally limited in our sample, as well as evenly distributed across states with different rates of growth. As a further robustness check, we also replicate our analysis excluding new entrants from the sample and find very similar results to our baseline specification.

Finally, one could be concerned that land as an input is quite different in scope from capital or labor, as firms do not often make year to year changes in their land holdings, instead undertaking lumpier land adjustments over longer periods of time. In that case, our results might be picking up noise or measurement error, rather than true adjustment costs. To avoid this source of bias, we thus replace our year-on-year specification for land-related adjustment costs with long differences (3- and 5-years): even though only around 20 percent of our original sample have sufficient information on land usage to allow for long differences estimation, we reassuringly find comparable results to our main specification.

# 5. Relevant factor market policies in Indian states

Could differential change in land and labor regulation across India states explain the trends in their adjustment costs? While finding specific causal mechanisms for these patterns is beyond the scope of this paper, the institutional framework surrounding factor markets within and across Indian states is critical to understanding the implications of our results. This section presents a short survey of the most salient aspects of land and labor regulation in Indian states, complemented by in-depth firm interviews in two states (Telangana and Uttar Pradesh)<sup>24</sup> which were conducted during 2017-18 to gather grassroots information on broad issues of governance, policy implementation, and law enforcement in these areas.

> 21 Results for this section are available from the authors upon request.

> 22 For this exercise, we consider as closure the following categories: closed, non-operational, non-existent within three years, closure but in existence, non-existent now, non-existent for more than three years, deregistration.

> 23 We define as new entrants those establishments in their first year of operations, that is, those created in the same year as the survey.

> 24 We conducted semi-structured interviews and focus groups with more than fifty MSMEs, Industry Associations, consulting firms and informed academics. The two states were selected so that they respectively belonged to our “fast-” and “slow-growth” state groups. The fact that Telangana is a recently formed state (2014) made it also a particularly interesting case-study for our analysis on regulations and quality of institutions.

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