Software, energy, realty at bottom of list in new company formation

Trading, finance, social services and manufacturing firms, on the other hand, topped the list during 2016-2018

Old-school cyber cafes, computer training centres, hardware service centres and mid-sized software firms grew at the slowest pace in terms of the number of new companies set up the past three years, according to a summary analysis of monthly data from Ministry of Corporate Affairs (MCA). New companies in the energy sector in general, and renewable space in particular, and real estate developers too posted the slowest growth in numbers during this period. 

The MCA releases monthly reports on the number of companies incorporated across sectors and states. This data shows that since 2016, the lowest number of new companies were set up in these three sectors—real estate, electricity/gas/water, and computer related software/business support services. 

On the other hand, trading, finance/fintech, transport, social services, and—surprisingly—manufacturing of traditional products such as metals, paper and wood, saw a flurry of new companies getting added every month, the data shows. 

Across states, while relatively under-developed northern domains saw a faster growth in new companies being formed within the corporate universe, traditional bigwigs and relatively developed states such as Maharashtra and Karnataka saw a dip in the growth of new enterprises. 

Delhi actually saw a contraction in the monthly number of companies added from 2016 to date. 

The indicator that has been used in the analysis is the monthly number of new companies incorporated, sector-wise and state-wise. As monthly data is subject to volatility, a five-month moving average has been taken as basis for the analysis. This reduces seasonality and volatility to a considerable extent. 

Manufacturing up, services down

The MCA still uses industry classification according to NIC 2004 (National Industrial Classification) in maintaining the database on incorporation, despite the fact that a later classification (2008) is in place. 

Segregating the companies according to NIC 2004, the data reveals that manufacturing companies get added to the corporate fold at twice the rate (in number) today than three years ago (90 per cent growth in monthly additions). 

The number of service sector companies added every month, on the other hand, rose only 37 per cent over three years, the data shows. The core sectors electricity, gas and water supply found few takers who would form new companies, and their monthly addition remained more or less stagnant. 

This seems to be counter-intuitive, since on the national level, the service sector has been showing higher growth than manufacturing. But it should be kept in mind that while the current analysis is based on the number of new companies being formed in India, the share in the economy of manufacturing and service sectors is based on value addition. 

The addition of agro-based companies too is slower than before. 

For instance, nearly 12 per cent of companies added every month were into manufacturing in May 2016. Come to mid-2019, their share rose to 16 per cent. Service sector companies occupied an 81 per cent share in new additions in 2016, which has been cut marginally to 78 per cent now. 

These trends broadly reflect the outcome of the government’s policy focus, experts said. 

“The Central Government gave a thrust to innovative start-ups and fintech companies after demonetisation, as well as manufacturing under the Make in India initiative. Further, e-commerce took a leap after data usage on smartphones became cheap, accessible and fast,” said Atul Pandey, Parnter, and corporate and companies law expert at Khaitan & Co LLP, a tier-1 law firm.

Diverse sectors show fastest growth 

Among sectors, companies in finance, health and education, and those involved in social and community work have started getting added faster to the corporate fold. 

While nearly 400-500 new companies in these domains were being formed each month in early 2016, now this number has gone up to 1,300-1,400; a growth of over 200 per cent. 

As against 150 companies working in the financial sector being set up each month, nearly 450 new companies get registered with the MCA every month now. 

On the contrary, companies providing business support services, such as software companies, start-ups, old-school hardware/software related service shops are adding to the corporate fold at a slower speed. 

Similar is the case with housing companies. The real estate sector was the worst hit after demonetisation, implementation of goods and services tax (GST) and state specific real estate regulatory authorities (RERA). This stagnant growth in new companies being formed could be partially due to the combined impact of these disruptions. 

Poorer states see faster additions 

If we look at how new companies are formed each month across five zones in India, four of them have shown average growth, except the central zone, which consists of Madhya Pradesh, Chhattisgarh and Jharkhand. This region saw a 64 per cent rise in monthly formation of new companies over three years. The rest of the regions saw a near average 30-40 per cent growth. 

But when we look at individual states, large variations emerge. Assam, Jammu & Kashmir, Kerala, Madhya Pradesh, and Uttar Pradesh saw a growth in monthly addition of new companies that was faster than the national average. 

West Bengal, Rajasthan, Odisha were those relatively underdeveloped states that saw a near-average growth in formation of new companies. 

Relatively developed states such as Karnataka, Tamil Nadu, Maharashtra, Andhra Pradesh, Telangana and Haryana saw new companies form slower than, or at a rate closer to the average national rate of monthly addition of companies. Delhi saw an extreme situation where the new companies added actually reduced over three years. 

Gujarat, among the most developed ones, recorded the fastest growth in new companies added every month over the three-year period.