Comment on “Informality, Micro and Small Enterprises, and the 2016 Demonetisation Policy in India”

• Date: 01 January 2019
• Author: Hal Hill
• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/aepr.12247

Comment on “Informality, Micro and Small

Enterprises, and the 2016 Demonetisation

Policy in India”

Hal HILL†

Australian National University

JEL codes: O17, O14, L26

Accepted: 7 July 2018

The study of Kurosaki (2018) is a very interesting, empirically rich, and well-referenced

analysis of micro and small enterprises in Indian manufacturing and service industries.

He compares registered and unregistered enterprises, centering on the question, does

informality make a difference? The major finding is that, although there are differences

between the two groups of enterprises, overall formality has a rather limited effect on

most aspects of their operations.

Many of the findings are unsurprising: the owners of the unregistered enterprises are

younger and less educated, and more likely to be female, migrants, and drawn from minor-

ity communities. One might hypothesize that enterprises that are formally registered with

the state apparatus would be more likely to comply with official regulations, including labor

laws, taxation requirements, environmental regulations, and so on. These impose exactions

on the enterprises, but it might also be expected that official status facilitates access to gov-

ernment resources (finance, fiscal incentives, etc). It might also confer at least some protec-

tion from arbitrary harassment by officialdom. Conversely, the unregistered enterprises

may have greater flexibility in their operations, with fewer compliance requirements. They

mayalsobemorelikelytooperateinthe“black economy,”avoiding tax and other obliga-

tions. However, their unofficial status might render them more vulnerable to harassment

from government officials, unless of course their informality lowers their official visibility.

The crucial parameter in this framework is the nature of the state and its regulatory

regime. The more complex and “predatory”it is, the more likely it is that enterprises

will deliberately seek informality. The earlier (prereform) “Licence Raj”acted as an

incentive to remain informal and small. It might have been useful if Kurosaki could

provide some guidance on this issue before embarking on the empirical analysis. Do

remnants of the Licence Raj still exist, and what form do they take, particularly as they

affect small and micro enterprises? How does India now compare on the various inter-

national “ease of doing business”metrics?

†Correspondence: Hal Hill, Arndt Corden Department of Economics, Crawford School, College

of Asia and the Pacific, Australian National University, Canberra, ACT 2601, Australia.

Email: hal.hill@anu.edu.au

© 2018 Japan Center for Economic Research 121

doi: 10.1111/aepr.12247 Asian Economic Policy Review (2019) 14, 121–122