OBJECTIVE National Economic Survey (NES) is the flagship annual document of the Ministry of Finance of the Government of India. It reviews the developments in the Indian economy over the past financial year, summarizes the performance on major development programs, and highlights initiatives of the government and the prospects of the economy in the short to medium term.

1. Entrepreneurship and Wealth
Creation at the Grassroots
CA Divakar Vijayasarathy
National Economic Survey 2019-2020
Volume No. 1 Chapter 2

2. Credits & Acknowledgements
Subash R

3. Legends Used in the Presentation
EODB Ease Of Doing Business
MCA Ministry of Corporate Affairs
GDDP Gross Domestic District Product

4. Presentation Schema
Introduction
India’s Rank in
Global Arena
Data and
Methodology
Growth of New
Firms in India
Services Sector as
a Boost for
Entrepreneurship
Entrepreneurial
Intensity
Spatial Dispersion
in
Entrepreneurial
Activity
Relative
Entrepreneurial
Capacity of
Districts in Various
Sectors
Spatial
Correlation
Contribution of
Entrepreneurship
to GDP
Effect of Labour
Laws on New-
Firm Formation
Literacy and
Entrepreneurship
Determinants of
Entrepreneurial
Activity
Market Access
and
Entrepreneurship
Way Forward

5. Introduction
Entrepreneurship represents a key focus area for many policy makers given its role in economic
development and subsequent employment growth.
The “Startup India” Campaign of Government of India recognizes entrepreneurship as an important
strategy to fuel productivity growth and wealth creation in India.
Start-ups are the main source for creation of new jobs owing to their inherent characteristic of innovation.
Start-up must be construed as a product of innovation which was not previously in existence rather than as
a stage in a firm’s lifecycle.
Keeping that in mind, we analyse the position of Indian economy with respect to start-up creation, factors
contributing to such creation and the various elements influencing the growth of start-ups.

6. India’s Rank in Global Arena
The figure represents the World Bank’s EODB
Entrepreneurship data together with that from
the U.S. Census Bureau to compare total
number of new firms in India with that in a
diverse cross-section of countries in Asia,
Europe and North America.
It could be seen that India has the 3rd largest
entrepreneurship ecosystem in the world.
Growth rate of new firms from 2014 to 2018
has been 12.2%.
From about 70,000 new firms created in 2014,
the number has grown by about 80% to about
1,24,000 new firms in India.

7. Data and Methodology
• The National Economics Survey, for the purpose of further analysis, has used the following
methodology to determine the number of new firms:
• First, data is obtained on district-level GDP at current prices from the CEIC India Premium
database. This data spans financial years ending 2000 through 2018.
• Second, entrepreneurship 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. Each firm
is then matched to a district using the registered office address of the firm in MCA-21.
• Third, data relating to the physical and social infrastructure of a district is accumulated from
the Socioeconomic High-resolution Rural-Urban Geographic Dataset on India.
• However, there is survivor bias in the dataset constructed as the number of firms which started
after 2000 but perished before 2018 could not be tracked, as a result of which, the real (net)
increase in the number of new firms could not be determined.
• The dataset does not consider the enterprises operating in the informal economy (entities which
does business without registrations)

8. Growth of New Firms in India
The figure emphasizes significant growth
in the birth of new firms over time. New
firm creation has gone up dramatically
since 2014 as discussed in the previous
slides.
The steady increase in new firms from
2014 to 2018 can be attributed to
government initiatives such as “Make in
India” in 2014 and “Startup India” in 2016
increasing the EODB.

9. Services Sector as a Boost for Entrepreneurship
India’s new economic structure, has a comparative
advantage in the Services sector.
New firm creation in services is significantly higher
than that in manufacturing, infrastructure or
agriculture.
The contribution of other three sectors to the GDP are
also significantly low when compared with services
sector.
Low working capital requirement, good infrastructure
and literacy level, short lived utility are some of the
factors contributing to establishment of new firms in
services sector.
Avoiding drone entrepreneurship, increasing literacy
levels, etc are some of the steps to be taken to transfer
the labour from unproductive sectors to formal
manufacturing and services sector.
Growth in new firms
Sectoral growth

10. Entrepreneurial Intensity
• India has low rates of entrepreneurship in the formal economy.
• In general, the creation of new firms is significantly higher for the developed economies.
• India has an entrepreneurial intensity which is significantly lower than developed economies
such as US and UK.
• Entrepreneurial Intensity:
• Despite having the 3rd largest entrepreneurship ecosystem in the world, there is still a lack of
initiative in the economy to start new ventures.
Particulars India United
Kingdom
United States
No of new firms per year per 1000 workers 0.1 12.22 12.12

11. Spatial Dispersion in Entrepreneurial Activity
• 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.
• The above figures show the ratio of new firms across districts to total firms.
• Though the peninsular states dominate entry of new firms, entrepreneurship is dispersed across India and is
not restricted just to a few metropolitan cities.

12. Relative Entrepreneurial Capacity of Districts in
Various Sectors
• An index of entrepreneurial activity for each district-sector is constructed.
• For any specific sector, this index is estimated as a district's share of new firms in that sector, divided
by that district's share of all new firms across all sectors.
• For example, a district responsible for 20 per cent of new firms in the agricultural sector, but only 10
per cent of all new firms, scores 2 on an index of relative entrepreneurial activity in agriculture,
suggesting relative strength in that sector.
• The entrepreneurial capacity of districts in various sectors are portrayed in the subsequent slides.

13. Agriculture Sector
• The figure suggests that relative to entrepreneurial
capabilities in Manufacturing, Services and Infrastructure,
entrepreneurial capabilities in the Agriculture sector are
not geographically localized and seem 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.
• While North East comprises of private enterprises in food
business such as organic produce, Madhya Pradesh and
Orissa are farmer producer companies which organize
farmers into a collective to improve bargaining strength.
Agriculture

14. • The figure suggests that entrepreneurial activity in the
Manufacturing sector is highest in the regions of Gujarat,
Meghalaya, Puducherry, Punjab and Rajasthan.
• Establishments in these regions are focused on textiles,
chemicals, metals, plastics, and pharmaceuticals
manufacturing.
• Pro-employer state regulations are one of the main
reasons for new establishment in these states.
• For example in Gujarat, the state government has reduced
compliance burden, increased transparency and timeliness
of processing of approvals and renewals of licenses etc.
• In Rajasthan, the number of employees required to form a
trade union has been increased to 30% of total workforce
which was previously only 15%.
• 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.
Manufacturing
Manufacturing Sector

15. • The figure suggests that entrepreneurial activity
in the Services sector is highest in the regions of
Delhi, Mizoram, Uttar Pradesh, Kerala, Andaman
and Nicobar, and Haryana.
• The nature of establishments in these regions is
not reflective of agglomeration economies and
spans diverse industries such as trading, financial
services, tourism and hospitality services,
retailing, and even religious leagues and missions.
Services
Services Sector

16. • The figure suggests that entrepreneurial
activity in the Infrastructure sector is highest
in the states of Jharkhand, Arunachal
Pradesh, Himachal Pradesh, Mizoram,
Jammu and Kashmir and Bihar, some of
which are characterized by poor levels of
extant infrastructure.
• In line with the poor infrastructural situation,
new firms in these states are largely engaged
in
• construction,
• logistics and transport,
• utilities generation,
• transmission and distribution,
alternative energy distribution, and
• Infratech.
Infrastructure
Infrastructure Sector

17. Spatial Correlation Between Entrepreneurial
Activity and Sectoral Unemployment
Entrepreneurial activity in the agriculture and
manufacturing sectors shares a negative spatial
correlation with the unemployment rate across
states. For example, an increase in the area of
agricultural lands would in turn increase the
number of private enterprises in food business,
thereby decreasing the unemployment rate of farm
workers.
In contrast, entrepreneurial activity in the services
and infrastructure sectors shares a positive spatial
correlation with unemployment rate across states.
That is, the stronger the infrastructure in an
economy, lesser is the need for engineers or
construction workers.
As a specimen, the correlation between overall
entrepreneurial activity and entrepreneurship in
manufacturing sector with unemployment rates is
presented in the side figure

18. Contribution of Entrepreneurship to GDP
Entrepreneurship is closely related to economic
growth.
To portray the relationship between entrepreneurial
activity with district level GDP, a regression model is
being used with the number of new firms as the
independent variable and the GDDP as the
dependent variable.
The resultant figure to the right shows that a rise in
entrepreneurial activity has a positive impact on
GDDP growth.
Specifically, a 10 per cent increase in registration of
new firms per district-year yields a 1.8 per cent
increase in GDDP.
LogofDistrictGDP
Log of new firms formed in district
3 years back

19. Effect of Labour Laws on New-Firm Formation
The first figure shows that flexible labour laws
in a district are positively correlated on a
qualitative basis with the establishment of new
firms in that district.
It could also be noticed that the increase in the
number of new firms in districts with flexible
labour laws mirrors the actual rise in the
number of new firms during the same time
period
Therefore it could be construed that flexible
labour laws are effectively pro-employer
reforms which has real effect on increase in
entrepreneurial activity in India.

20. Literacy and Entrepreneurship
• The stories of most of the popular
entrepreneurs started from becoming
a college dropout. Therefore, one
must not confuse literacy with
knowledge.
• Literacy, in this context, means the
extent to which the ability of a district
to provide education is being utilised
by the demographic.
• The figures represent the correlation
between literacy and number of new
firms formed.
• In figure 1, the largest increase in the
number of new firms occur only when
the literacy rate rises above 72%. This
suggests that small levels of increase
matter less and a larger payoff could
be attained only when literacy levels
are high.
• Similar pattern is visible with the
number of colleges as well in figure 2.

21. Determinants of Entrepreneurial Activity
• Determinants of Entrepreneurial activity, when identified correctly, would prove to be of
tremendous value to policy makers to make use of the entrepreneurial heterogeneity in India.
• Some of the determinants of entrepreneurial activity are as follows:
- Local Demographic: Given the success story of any big firm, the characteristics of local population
in a district will have immense influence on the entrepreneurial activity
- Physical connectivity: The measures of physical infrastructure include access to basic physical
infrastructure in the district as well as physical connectivity that captures across district
infrastructure in most cases. Proximity to large population centers likely allows the startup to
expand markets and scale operations.
- Technology and Finance: Digital literacy and ease of access of entrepreneurs to technology and
finance are also salient to fostering entrepreneurship and increasing productivity and
competitiveness.
- Regulatory framework- Entrepreneurial activity can also be impeded by the regulatory framework
in the region that hinder entry and exit, limit competition and increase costs of compliance and
administration.
• All of the above factors whether in individual or in interaction with one another represent key ways
in which policy makers can influence spatial distribution of entrepreneurial activity.

22. Market Access and Entrepreneurship
• Superior access to markets is also associated with
higher entrepreneurial activity.
• The first figure shows the effect of the proportion of
villages that are connected by tar roads in a district.
• It could be noticed that up to the point where 91% of
the villages in the district are connected by roads, the
number of new firms increases, after which it declines.
• Reason for this can be seen from two different angles:
• One being the increase in competition with the
expansion in market as a result of increased
connectivity. This would discourage the
entrepreneurs to discontinue operations or to
restrict scope of operation.
• The other way to look at it is that the increase in
connectivity has opened up other opportunities
to earn a living thereby removing the incentives
to take risks and start a business.
• In figure 2, the greatest improvement is seen only
when the distance to a market decreases below 42%.
Same logic applied above can be applied to figure 2.

23. Way Forward
• 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 proves that grassroots entrepreneurship is not just
driven by necessity.
• 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. 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, 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, 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.

24. Thank You!
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