economic-survey-vol-1-chapter-2-entrepreneurship-and-wealth-creation-at-the-grassroots

Entrepreneurs are seen as agents of change that accelerate innovation in the economy and hence creates wealth.  India, while having the third-largest entrepreneurship ecosystem in the world after the US and China, have lower rates of formal entrepreneurship on a per-capita basis when compared to other countries. 

There are several factors causing this anomaly which the survey has sought to analyze. The survey has analyzed entrepreneurial activities at the bottom of the administrative pyramid i.e. in over 500 districts in India and their correlation with wealth creation. 

The present state of Entrepreneurship

  • New firms’ creation has gone up from about 70,000 in 2014 to about 1,24,000 new firms (by about 80 percent) in 2018.
  • The creation of new firms in the service sector is significantly higher than those in manufacturing and agriculture.
  • 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 (Gross District Domestic Product). 
  • Distribution of new firms is heterogeneous across regions and sectors and is not just spread around a few cities.                                       
  • Literacy and physical infrastructure in the district propel local entrepreneurship significantly. Thus, new firms’ creation is lower across districts in Eastern and Northern India where literacy rate is lower and conversely, higher in Southern and Western Indian districts. 
  • States with flexible labor regulations have a higher number of new firms (which in turn can create new jobs)Rajasthan, for example, has introduced several reforms that are viewed as pro-employer and thus has witnessed a kink in business activities. 

The determinants of entrepreneurial activity

On the basis of its findings, the survey has deduced the following as key determinants in entrepreneurial activity. 

  • Higher education levels in a district enable the development of better human capital that relates to an increased supply of ideas and entrepreneurs.
  • The number of colleges in the district and the proportion of the population that is literate is also a significant factor in inducing entrepreneurship. 
    • For example, the successful contribution of the privatization of engineering colleges to India’s software exports can not be understated. 
  • The access to physical infrastructure in a district is measured using the proportion of villages in a district that is connected by tar roads. This measure is expected to correlate with access to other public goods like electricity, water/ sanitation facilities, and telecom services that are fundamental to all businesses. 
  • Proximity to large population centers likely allows the startup to gain market access and scale up operations. It also implies better access to inputs and a talented workforce. 
  • Demography: Inverted-U relationship between regional age structure and entrepreneurship rates that underlies India’s “demographic dividend”, establishing this variable as an important driver of entrepreneurship. 

Policy suggestions

  • Measures to increase the literacy levels rapidly through the institution of more schools and colleges shall be taken to spur entrepreneurship and consequently local wealth creation.
  • Better connectivity of villages through tar roads will likely improve access to local markets and improve entrepreneurial activity. 
  • As the manufacturing sector has the potential to create maximum jobs, states must focus on enabling ease of doing business and flexible labor regulation to foster job creation.

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