Analysing regional and sectoral productivity changes in the Indian economy

Motivation Numerous domestic and international studies have shown that India's business environment has shortcomings that have hindered and distorted investment, reducing growth and job creation. There is geographical variation in the distribution of sectoral and regional production in India. Therefore, it is necessary to investigate the role geography plays in evaluating the effects of shifts in aggregate and disaggregate productivity. Purpose This research attempts to build a unified framework to consider regional and sectoral changes as heterogeneous factors affecting productivity in India. It explores whether the fundamental changes in productivity are locational or sectoral. Approach and Methods This article focuses on three aspects: (1) It identifies variables based on previous literature. The aggregate industry analysis for both Punjab and India is based on independent variables. The study uses the 2SLS‐estimator using STATA in a single‐step endogeneity problem. (2) For disaggregate or sectoral analysis, it identifies four industries across India and Punjab. We confine our analysis to these four industries since the present study is done at both aggregate and disaggregate levels covering national and state level analysis. (3) It sets out separate interpretations for the aggregate analysis, setting it apart from disaggregate analysis. Findings For aggregate industry analysis, the results for Indian and Punjab industry adhere to Verdoorn's law which states that in the long run productivity generally grows proportionally to the square root of output. In that value‐added growth is a major factor affecting total factor productivity for Indian firms across both regions. The Punjab group shows non‐linearity between productivity and concentration. Concentration leads to some increase in productivity but this then declines. Policy Implications Policy‐makers should promote the establishment of more medium‐sized firms to enhance productivity across all regions in India. The skilled‐labour ratio emerged as significant for the Punjab group, though this is because the state has a higher proportion of small‐scale industries which are more labour intensive than the overall India group. As such, specific policies should be aimed at the manufacturing sector at state level to enhance productivity, taking into consideration unique features of each group. Policy‐makers should address the inefficiency of the industrial policy overseen by the Ministry of Micro, Small and Medium Enterprises.