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

• Published date: 01 January 2019
• DOI: http://doi.org/10.1111/aepr.12246
• Author: Peter J. Morgan
• Date: 01 January 2019

Comments on “Informality, Micro and Small

Enterprises, and the 2016 Demonetisation

Policy in India”

Peter J. MORGAN†

Asian Development Bank Institute

JEL codes: O17, O14, L26

Accepted: 14 July 2018

This is a careful and revealing analysis of the poorly understood segment –micro and

small firms. Kurosaki (2018) touches on a number of important questions related to

economic development, including the potential of informal firms to contribute to the

economic development process, the determinants of financial access for firms, and the

effects of demonetization, where, in this case, the implementation of demonetization in

India in November 2016 provided a very significant natural experiment.

Kurosaki tackles two basic questions: (i) what are the differences between registered

and nonregistered micro and small firms and (ii) what differences were there in the effects

of demonetization on these two groups of firms? The main contribution of Kurosaki’s

paper is the use of a new data set of surveys of 506 micro and small manufacturing and

nonmanufacturing firms in the Delhi area, with a first wave in 2014 and a smaller wave

(287 firms) in late 2017. The survey data cover both registered and unregistered firms,

where registered firms are assumed to be “formal”and unregistered firms to be “informal.”

Regarding the first question, Kurosaki uses both bivariate comparisons and multi-

variate regression analysis. The results of the first set of regressions, which used regis-

tration status as the dependent variable, were fairly limited, with the most significant

differences being the religion and educational level of the owner and whether the firm

was in manufacturing or services. The second set of regressions using a variety of per-

formance variables as dependent variables found that registration status is negative for

process innovation, positive for product innovation, but not significant for sales,

profits, or return on assets. The former two effects were significant mainly for

manufacturing firms. Firms with access to bank or government credit initially had

higher sales and profits, but this was not related to registration status, and the result

mainly held for manufacturing firms. Interestingly, the author found that registration

tended to widen the gap between firms with access to credit and those without such

access rather than narrowing it. This suggests that process innovation may be a default

response when firms are unable to access credit to make product innovations.

†Correspondence: Peter J. Morgan, Asian Development Bank Institute, Kasumigaseki Bldg., 8F,

3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan. Email: pmorgan@adbi.org

© 2018 Japan Center for Economic Research 119

doi: 10.1111/aepr.12246 Asian Economic Policy Review (2019) 14, 119–120