Location-based tax incentives: Evidence from India

Abstract

This paper studies the impact of the Government of India financed "New Industrial Policy for Uttarakhand and Himachal Pradesh", whereby beginning 2003, new industrial units and existing units upon expansion were given 100% income tax and excise tax exemption. Using a difference-indifferences approach, I find a large increase in employment, number of factories, total output and fixed capital at the 3-digit industry level. Using firm level data, I find that the average employment, output, fixed capital, and additions to plant and machinery increased for existing firms as a result of this policy. Hence I show that the policy change affected both the intensive and extensive margins. I also look at heterogeneity by firm size and find that the policy led to employment and output increases for smaller firms. Finally, I use synthetic control methods (Abadie, Diamond, and Hainmueller (2010)) as a robustness check for the treatment effects of the policy change.

Geographic Concentration in Indian Manufacturing and Service Industries: Evidence from 1998 to 2013

“…Similarly, the central government implemented a tax incentive and capital subsidy scheme in 2003 in two relatively under‐industrialized states (Himachal Pradesh and Uttarakhand). Applying a difference‐in‐differences approach, Chaurey () finds that the policy resulted in large increases in outcomes such as employment, number of firms, and total output in the treatment states relative to the control states.…”

Place-Based Preferential Tax Policy and Its Spatial Effects:

“…Similarly, districts of Group 3 did not adversely affect neighboring districts of Group 5 and Group 6. This may explain in part why Chaurey (2016) does not find any spatial spillovers when he assessed India's New Industrial Policy. Himachal Pradesh, one of the two states covered by the policy, was designated a backward state in 1993 and its neighboring state Punjab had all districts from Group 6.…”

“…Studying the impact of the special economic zones program in the PRC, Wang (2013) found that these zones increased the level of foreign direct investment and exports as well as average wages of workers in the host municipalities and generated a moderate displacement effect in the adjacent municipalities. Closer to our paper is Chaurey (2016), which examines the New Industrial Policy of India's federal government that offered tax exemptions and capital subsidies for firms in two states, Uttarakhand and Himachal Pradesh, since 2003. Applying a difference-in-differences approach, the author showed that the policy resulted in large increases in outcomes such as employment, number of firms, and total output in the treatment states relative to the control states.…”

The economic impact of city–county consolidations: a synthetic control approach

“…The Synthetic Control Method (SCM) invented by Abadie and Gardeazabal (2003) and further developed by Abadie et al (2010) and Abadie et al (2015) is a unique technique for investigating the specific effects of a particular social shock or institutional change. Government policy is a common shock so following Abadie et al (2010) more recent research such as Marcus and Siedler (2015) and Chaurey (2016) continues to employ the SCM to evaluate the effect of a wide variety of government policies. The SCM works by calculating a synthetic counterfactual which could not happen and has not happened in the real world.…”