the results provide further evidence for the impact of the New Industrial Policy by confirming the differences between micro- and larger firms.

# _6.3 Indirect effects through spillovers_

In this section, we explore whether the New Industrial Policy generated indirect local impact because of agglomeration economies. Table 11 presents the results from Equ.(4), in which we use a measure on the overall coagglomeration tendency between sectors to capture spillovers. The conclusion that both central excise tax incentives and non-central excise tax interventions have significant direct impact on employment even for businesses within the same sector still holds in this extended specification.

Controlling for these direct effects, we find that sectors with a stronger tendency to collocate with sectors receiving positive excise tax incentives saw a net increase in firm size as one crosses the border from Uttar Pradesh to Uttarakhand. In contrast, controlling for direct effects, sectors with a stronger tendency to collocate with non-treated sectors see both a net decline in firm size and a reduction in the number of firms.

These results suggest the New Industrial Policy had significant indirect local employment effects through ties between industries. These indirect effects could be due to the typical benefits of agglomeration economies: greater product diversification, better labor matching, and stronger knowledge spillovers. Being located in close proximity made firm in different industries more productive, which in turn attracted more investments.

Applying Equ.(5), we probe the indirect effects and explore which benefit(s) might have been more prominent. We focus on two Marshallian mechanisms, input-output linkages and labor pooling, that can lead to spillovers between industries. Table 12 reports the results, which are mostly comparable to those in Table 10, except that _Target_ appears to be marginally matter for the total number of firms. Overall, the results on direct effects continues to hold in this specification. Additionally, the results on labor-pooling related variables are strong and consistent with the results in Table 11 while the results on input-output linkages related measures are weak and do not show consistent patterns.

Controlling for direct effects, sectors sharing similar labor requirements with sectors receiving positive excise tax incentives saw a net increase in firm size as one crosses the border from Uttar Pradesh to Uttarakhand. Instead, sectors that have stronger labor-related ties to non-treated sectors saw a decline in firm size and a slightly reduction in the number of firms. Overall, excise tax incentives not only affect treated sectors directly but also impact other sectors depending on whether they share a labor pool with the treated sectors or not.

For places within 40 kilometers from the border, a one-standard deviation increase in labor-related ties to sectors receiving positive excise tax incentives would result in an additional 0.6 percent employment increase in a sector in Uttarakhand compared to in Uttar Pradesh. Conversely, a one-standard deviation increase in labor-related ties to sectors not receiving the incentives would lead to an additional decline of 0.4 percent in a sector’s employment in Uttarakhand compared to in Uttar Pradesh.

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