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Size dependent tax incentives, threshold effects and horizontal subcontracting in Indian manufacturing: Evidence from factory and firm-level panel data sets

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  • K.V. Ramaswamy

    (Indira Gandhi Institute of Development Research)

Abstract

India's industrial protection and promotion policies for small-scale enterprises have figured prominently in the literature on industrialization policies in developing countries. These size dependent tax incentives could encourage fragmentation of production and prevent natural up-scaling of firm sizes. The author presents a new empirical application of the idea of threshold burden of tax incentives in India. The study is based on a large unbalanced panel of manufacturing factories in the formal sector spanning the period 1999-2008 and a panel of manufacturing companies covering the period 1990-2010. Average subcontracting intensity was found to be significantly higher in manufacturing factories and firms with sales turnover below the ceiling level set by the tax rules. Econometric tests based on Fixed Effect models supported the hypothesis that firms take advantage of tax incentives by staying below the threshold sales turnover. This is consistent with the idea of threshold effects of size dependent tax incentives.

Suggested Citation

  • K.V. Ramaswamy, 2016. "Size dependent tax incentives, threshold effects and horizontal subcontracting in Indian manufacturing: Evidence from factory and firm-level panel data sets," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2016-007, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2016-007
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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2016-007.pdf
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    7. Moreno-Monroy, Ana Isabel & Pieters, Janneke & Erumban, Abdul Azeez, 2012. "Subcontracting and the Size and Composition of the Informal Sector: Evidence from Indian Manufacturing," IZA Discussion Papers 6785, Institute of Labor Economics (IZA).
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    Cited by:

    1. Dipankar Gupta, 2020. "Think “Big”: Strategizing Post-coronial Revival in India," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 63(1), pages 145-150, October.
    2. Peter J. Buckley & Michael Murphree & John Anderson, 2024. "Horizontal subcontracting and the global factory," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(7), pages 934-944, September.
    3. Dipankar Gupta, 2019. "Against Thresholds: Raising Capacity and Formalizing the Economy," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 62(1), pages 15-30, March.

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    More about this item

    Keywords

    Firm Size; Threshold Effects; Regulations; manufacturing and small-scale enterprises;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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