contracting institutions that the literature identifies to be of particular importance to the performance of Indian industry, namely, labor regulation, the financial system.

The table is based on an item in the instruments of the 2002 and 2005 waves of the FACS survey that asked enterprise managers to rate problems in some 20 different elements of their business environment as constraints to their growth and operations on the following scale: 0=no obstacle, 1= minor obstacle, 2=moderate obstacle, 3=major obstacle, and 4=very sever obstacle. We show in Figure 4 the percentage of respondents that reported problems with each aspect to be a significant obstacle, that is, rated the aspect at scale 2 or higher as a constraint, over the full sample pooled across states, but for each survey wave separately. Although there are sizeable differences between states in terms of the relative importance of any particular element, it is safe to say that corruption, power shortages, access to finance, and labor regulation are rated in both waves among the top 5 or 6 constraints in all states without exception.

Ideally one would seek to identify the effects of all potential growth bottlenecks rated by a significant proportion of respondents in the context of the growth equation we have estimated. Unfortunately the effects of some of the constraints rated by survey respondents could not by identified with the data at hand for lack of instruments. In particular we cannot identify the effects of problems of tax administration, tax rates, crime and crime and violence.<sup>3</sup> As Figure 4 and table 1 indicate, labor regulation is regarded as a significant growth constraint by a sizeable proportion of businesses in both waves. Although this proportion decreased between the two waves of the survey for the full sample, the decline is confined to high growth states (table 1). More significantly, labor regulation is rated as an obstacle by a large proportion of businesses in all state groups, the proportion being twice as large in high-growth states as it is in low growth states. Turning to power shortages, twice as many businesses rate it as an obstacle to growth as those who rate labor regulation in the same way. Unlike labor regulation, power shortages do not seem to have weakened as an obstacle to growth between the two waves if we measure the strength of an obstacle by the proportion of those who report it as such. But, again this conceals the diversity of the situation across states. In fact a smaller proportion of businesses in highgrowth states complained about power shortages in the 2005 than did in the same states in the 2002 wave. On the other hand, things seem to have worsened in low growth states in the sense of more businesses complaining about shortages there in 2005 than did in 2002.

About a quarter of enterprises surveyed in 2002 rated problems of access to finance as a moderate to very severe obstacle over the all India sample. This dropped steeply in the 2005 wave, but mainly on account of sharp falls in the proportion reporting the problem

> 3 Another potentially strong bottleneck to industrial growth that did not turn out to be statistically significant in our investment regression is access to land, which comes out as major factor in McKinsey (2001).

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