Economic Survey Vol.1 Ch.2: Entrepreneurship and Wealth Creation at the Grassroots

The “Startup India” campaign of the Government of India recognizes entrepreneurship as an increasingly important strategy to fuel productivity growth and wealth creation in India.

• Entrepreneurship is measured as the count of new firms in the Ministry of Corporate Affairs (MCA) – 21 database, a public dataset that provides a one-time snapshot of all active firms registered with the Ministry of Corporate Affairs (MCA) between 1990 and 2018.
• Entrepreneurship at the bottom of the administrative pyramid – a district – has a significant impact on wealth creation at the grassroots level.
• Birth of new firms is very heterogeneous across Indian districts and across sectors.
• Literacy and education in the district foster local entrepreneurship significantly.
• The eastern part of India has the lowest literacy rate of about 59.6 % according to the census of 2011. This is also the region in which new firm formation is the lowest.
• The level of local education and the quality of physical infrastructure in the district influence new firm creation significantly.
• Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.

• Entrepreneurs are seen as agents of change that accelerate innovation in the economy. On a per-capita basis, India has low rates of entrepreneurship in the formal economy. A large number of India’s enterprises operate in the informal economy.
• Though the peninsular states dominate entry of new firms, entrepreneurship is dispersed across India and is not restricted just to a few metropolitan cities.

• The impact of new firm entry is greatest in the Manufacturing and Services sectors.
• All regions demonstrate strong growth in entrepreneurial activity over time with the exception of the eastern states. The agriculture sector is not geographically localized and seems to be distributed evenly across most districts in India.
• States in the highest quintile of relative entrepreneurial activity in the Agriculture sector are Manipur, Meghalaya, Madhya Pradesh, Assam, Tripura, and Orissa. North-Eastern states are more likely to be private enterprises in the food business such as organic produce farms and tea plantations.
• The majority of the establishments in Madhya Pradesh and Orissa are farmer producer companies. The manufacturing sector is highest in the regions of Gujarat, Meghalaya, Puducherry, Punjab, and Rajasthan.
• States with inflexible labour laws such as West Bengal, Assam, Jharkhand, Kerala, and Bihar were classified in the lowest quintiles of entrepreneurial activity. Gujarat’s labour reforms are viewed as pro-worker.
• Entrepreneurial activity in the Infrastructure sector is highest in the states of Jharkhand, Arunachal Pradesh, Himachal Pradesh, Mizoram, Jammu and Kashmir, and Bihar have been characterized by poor levels of extant infrastructure.

• Apart from local population characteristics, district-level conditions, and agglomeration economies, the survey highlighted two key drivers of heterogeneity in district level Entrepreneurial activity:

Physical infrastructure:

• That includes basic physical infrastructure such as roads, electricity, water etc.and proximity to large population centres. Superior physical infrastructure will likely promote entrepreneurial activity and allows the start-up to expand markets and scale operations.
• However, the survey found that there exists a threshold beyond which an increase in physical infrastructure gives diminishing returns, i.e. beyond a point, increased access to local markets may create hyper-competition and discourage entrepreneurship.
• At the same time, increased levels of basic infrastructure development might also open up potential entrepreneurs to other opportunities and consequently, decrease the incentives to become entrepreneurs.

Social Infrastructure:

• That includes education level in a district identified through the proportion of the literate population and number of colleges. Higher education levels in a district enable the development of better human capital that relates to increased supply of ideas and entrepreneurs and the largest increases appear when literacy rises above 72 %.

• Increasing Literacy and education in a district foster local entrepreneurship significantly. The impact is most pronounced when literacy is above 70 %.
• Improving Physical Infrastructure quality in the district influences new firm creation significantly.
• Ease of Doing Business and flexible labour regulation enable new firm creation, especially in the manufacturing sector.
• The survey suggests enhancing the ease of doing business and implementing flexible labour laws can create maximum jobs in districts and thereby in the states.