Product Market Regulation and Economic Performance across Indian States

This paper uses the OECD's indicators of product market regulation to assess the extent to which the regulatory environment affects economic performance across Indian states. The degree to which product market regulation is supportive of competition is found to vary considerably across states. Furthermore, regression results indicate that these differences in regulation have a significant impact on both labour and total factor productivity. States in which the regulatory environment restricts competition have lower productivity growth in comparison to states in which regulation is more supportive of competition. Relatively liberal states are also found to attract more foreign investment and have a larger share of employment in the organised sector in comparison to states with a more restrictive regulatory environment. State governments that have enacted a relatively liberal regulatory framework have also been more successful at infrastructure provision. Ongoing reform of product market regulation is necessary to improve productivity growth further and ensure that the benefits of reform are distributed more widely across the country. This working Paper relates to the 2007 Economic Survey of India (www.oecd.org/eco/surveys/india).