2013 Reports

Location Based Tax Incentives: Evidence from India

Chaurey, Ritam

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-in-differences 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.