POLICY IMPLICATIONS FOR FAST-TRACKING ENTREPRENEURSHIP AND WEALTH CREATION – (Exerpts from Chapter 2 of Economic Survey 2019-20 Volume 1)

Despite being the 3rd largest ecosystem for entrepreneurship in the world, India appears to have lower rates of formal entrepreneurship on a per-capita basis when compared to other countries. Consistent with the prevailing wisdom, a significant association between the count of new firms born in a district and the GDDP of that district is found – a 10 per cent increase in registration of new firms is associated with a 1.8 per cent increase in GDDP. This contribution of entrepreneurial activity to GDDP is strongest for the Manufacturing and Services sectors. Further, significant heterogeneity in entrepreneurial activity across districts demonstrates the critical role played by social and physical infrastructure in determining such heterogeneity. For instance, the eastern part of India has the lowest literacy rate of about 59.6 per cent according to the census of 2011. This is also the region in which formal entrepreneurial activity is the lowest. The analysis in this chapter, therefore, suggests the following policy implications.
First, measures to increase the literacy levels rapidly through the institution of more schools and colleges will spur entrepreneurship and consequently local wealth creation. Following the successful contribution of privatization of engineering colleges to India’s software exports (Arora et.al., 2011), governments could also explore the privatization of education to augment education capacity at all levels of education.
Second, better connectivity of villages through tar roads will likely improve access to local markets and improve entrepreneurial activity. However, in terms of prioritization, this may not be as crucial as investments in education. Moreover, increasing the access to local markets might create other types of opportunities which might discourage entrepreneurship. Hence investments in infrastructure especially those undertaken to increase entrepreneurial activity should be weighed against how improved infrastructure creates other kinds of opportunities that might be consequential to a district’s GDDP.
Third, policies that foster ease of doing business and flexible labour regulation foster entrepreneurial activity, especially in the manufacturing sector. As the manufacturing sector has the potential to create the maximum jobs, states must focus on enabling ease of doing business and flexible labour regulation to foster job creation.

Chapter 2 at a Glance
♦ This chapter examines the content and drivers of entrepreneurial activity at the bottom of the administrative pyramid – over 500 districts in India. The analysis employs comprehensive data on new firm creation in the formal sector across all these districts from the Ministry of Corporate Affairs (MCA)-21 database.
♦ First, using the World Bank’s Data on Entrepreneurship, this chapter confirms that India ranks third in number of new firms created. The same data shows that new firm creation has gone up dramatically in India since 2014. While the number of new firms in the formal sector grew at a cumulative annual growth rate of 3.8 per cent from 2006-2014, the growth rate from 2014 to 2018 has been 12.2 per cent. As a result, from about 70,000 new firms created in 2014, the number has grown by about 80 per cent to about 1,24,000 new firms in 2018.
♦ Second, reflecting India’s new economic structure, i.e. comparative advantage in the Services sector, new firm creation in services is significantly higher than that in manufacturing, infrastructure or agriculture.
♦ Third, grassroots entrepreneurship is not just driven by necessity as a 10 percent increase in registration of new firms in a district yields a 1.8 percent increase in GDDP. Thus, entrepreneurship at the bottom of the administrative pyramid – a district – has a significant impact on wealth creation at the grassroot level. This impact of entrepreneurial activity on GDDP is maximal for the manufacturing and services sectors.
♦ Fourth, birth of new firms is very heterogeneous across Indian districts and across sectors. Moreover, it is dispersed across India and is not restricted to just a few cities.
v Fifth, literacy and education in the district foster local entrepreneurship significantly. For instance, the eastern part of India has the lowest literacy rate of about 59.6 per cent according to the census of 2011. This is also the region in which new firm formation is the lowest. In fact, the impact of literacy on entrepreneurship is most pronounced when it is above 70 per cent.
♦ Sixth, the level of local education and the quality of physical infrastructure in the district influence new firm creation significantly.
♦ Finally, policies that enable ease of doing business and flexible labour regulation enable new firm creation, especially in the manufacturing sector. As the manufacturing sector has the greatest potential to create jobs for our youth, enhancing ease of doing business and implementing flexible labour laws can create the maximum jobs in districts and thereby in the states.
♦ Literacy, education and physical infrastructure are the other policy levers that district and state administrations must focus on foster entrepreneurship.