Impact of groundwater accessibility on performance of firms

Industrial production is a hallmark of development and can accelerate economic growth. In some developing countries such as India, the manufacturing sector has not expanded since 1980, whereas in other places such as China, a rapid increase in industrial activity has been accompanied by a tremendous surge in standards of living. This raises the question of what constraints impede the performance of the industrial sector. While regulations governing the use of labor (Besley and Burgess, 2004) and capital have been identified as key constraints to industrial growth, there is scant evidence on whether accessibility of vital natural resources, such as groundwater, also influences industrial performance.  This project fills this gap by determining how and why groundwater accessibility influences industrial outcomes and productivity.

The study will make use of a physical limitation that discontinuously raises the cost of accessing groundwater to examine how such a jump in the cost of groundwater access affects firm outcomes (including gross output, total employment, outstanding loans, total value of inputs, total product value, value added, and productivity). To do so, the study will employ nationally representative Micro, Small, and Medium Enterprise Census data along with groundwater measures from observation wells in India in a regression discontinuity design framework.  The study will also shed light on the underlying mechanisms by testing two hypotheses:  1) In groundwater-inaccessible areas, does low agricultural productivity and resulting poverty dampen the demand for manufactured goods and thus impact firms; or alternatively, 2) does groundwater inaccessibility raise the cost of manufacturing directly?

Policy makers and development practitioners have expressed concern over Indian development patterns. Without a broadening industrial base, sustaining long-run growth may not be feasible (Kochhar et al, 2005). This project will highlight a key constraint impeding economic growth in India.