According to a latest UK study, India has the second highest number of shadow entrepreneurs in the world. Indonesia has claimed the top position in the study. The survey states that for every legally registered business in India, there are 127 shadow businesses that are not.
A large number of shadow entrepreneurs have been hampering the economic growth of India by conducting their businesses without registering with the official authorities, according to the researchers at Imperial College Business School, London.
The research team formed a league table test which was based on an extensive study of 68 countries. The data for the league table was combined from the World Bank and Global Entrepreneurship Monitor. They concluded that Indonesia has the highest ratio of shadow economic businesses to every business that is legally registered which is 130. This was closely followed by India where the ratio is 127. Shadow entrepreneurs are basically people who run a business by selling legitimate services and goods but their businesses are not registered.
These entrepreneurs function in a shadow economy by working outside the reach of the government authorities. They don’t even pay taxes.
Professor Erkko Autio, co-author of the study report states that it is extremely important for developing countries to understand the shadow economy entrepreneurship as it is one of the key factor affecting the economic development of a country. The report is a first of its kinds as it makes an effort to examine the number of entrepreneurs functioning in the shadow economy for the very first time.
According to him, the government can play a crucial role in the transition of shadow economy entrepreneurs to the formal economy. The government needs to understand its duty and implement necessary policies as these shadow entrepreneurs hamper the economic growth of the country as they are less likely to come up with innovative ideas, accumulate capital for them and then invest in the economy.
These shadow entrepreneurs account to about 80% of the total economic activity in the developing countries. Roadside food stalls, unlicensed taxicab services and small landscaping operations are some of the examples of such shadow businesses.
The report also suggested that in order to increase the rate of formal economy entrepreneurs by up to 50 %, developing countries like India should try to improve the quality of its democratic institutions. The 50% increase is only possible when the government is somehow able to cut the shadow entrepreneurs by a third at the same time. As a result of all these measures, the government will be able to rake in additional revenue from the taxes.
The report also notes that these shadow businesses lead to unfair competition to registered businesses, loss of tax revenue and poor productivity. These enterprises are out of reach of law as they are unregistered and often such entrepreneurs become vulnerable to corrupt officials working in the government.
The report also concluded that formal entrepreneurs are most likely to propagate in a place where there are proper political and economic frameworks in place.