India has a much lower level of formal entrepreneurship on a per-capita basis when compared to other countries. Entrepreneurship is particularly missing at the grassroots, especially India's districts. This has a significant bearing on both wealth creation and jobs. How can Indian states fix it? The Economic Survey 2019-2020 pushes for privatisation of education, more flexible labour regulation, as well as better connectivity to villages to fast-track entrepreneurship at the bottom of the administrative pyramid.
Firstly, where India stands? Between 2006 and 2016, the mean (median) number of new firms registered per year per 1,000 workers was 0.10 (0.11). In contrast, the mean (median) entrepreneurial intensity for the United Kingdom and the United States was 12.22 (11.84) and 12.12 (11.81) respectively, the Survey informs. "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," the Survey points out in a chapter on 'Entrepreneurship and Wealth Creation at the Grassroots'.
A look at unemployment data in India as per PLFS
It recommends increasing the literacy levels rapidly through the institution of more schools and colleges. There is a link between literacy and start-up activity. The eastern part of India has the lowest literacy rate of about 59.6 per cent - new firm formation in the region is the lowest. "Following the successful contribution of privatisation of engineering colleges to India's software exports, governments could also explore the privatisation of education to augment education capacity at all levels of education," the Survey suggests.
The Survey added that India needs better connectivity of villages through tar roads to improve access to local markets. The third and perhaps the most important is policies that boost ease of doing business. These must include flexible labour regulation, the Survey states, citing the example of states such as Gujarat and Rajasthan.
"Entrepreneurial activity in the manufacturing sector is highest in Gujarat, Meghalaya, Puducherry, Punjab and Rajasthan. Within Gujarat, the most entrepreneurially active districts in the manufacturing sector are Surendranagar, Rajkot, Bhavnagar and Surat. Establishments in these regions are focused on textiles, chemicals, metals, plastics, and pharmaceuticals manufacturing," the chapter informs. "It is noteworthy that three of the regions in the highest quintile of entrepreneurial activity in this sector - Gujarat, Punjab and Rajasthan - were classified in a prior economic survey as states with flexible labour laws. Further, states classified in the Economic survey 2018-19 as states with inflexible labour laws such as West Bengal, Assam, Jharkhand, Kerala and Bihar were classified in the lowest quintiles of entrepreneurial activity," it adds.
The Survey lists key labour reforms that states can just copy-paste.
"While Gujarat's labour reforms are viewed as pro-worker, the state has also passed other regulations that improve ease of doing business, including reduction in compliance burden, transparent and timely processing of approval and renewal of applications, and reduction in stipulated timelines for granting and renewal of manufacturing sale licences, amongst others. Rajasthan too has introduced several reforms that are viewed as pro-employer. For example, to reduce the influence of trade unions, the state has increased the costs of union formation by increasing the minimum membership requirement to form a union to 30 per cent of the total workforce at an establishment, up from 15 per cent earlier. Similarly, the state has said that no prior approval is required for retrenchment or shutting down units in companies employing up to 300 people, up from the earlier limit of 100 workers," the chapter reads. The long and the short of it: it's about time India gets rid of the archaic Industrial Disputes Act, 1947.