What are Shadow entrepreneurs?

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It has been observed that there has been a global rise of shadow entrepreneurship, in various sectors such as education for certificates, finance for easy loans, the betting economy that is online games and healthcare in e-pharmacies.

Given the potential perverse consequences of shadow entrepreneurship in the long run for consumer welfare, regulation is needed to monitor quality of services.

What is Shadow entrepreneur?

  • Shadow entrepreneurs are individuals who manage a business that sells legitimate goods and services but they do not register their businesses.
  • This means that they do not pay tax, operating in a shadow economy where business activities are performed outside the reach of government authorities.
  • Types of businesses include unlicensed taxicab services, roadside food stalls and small landscaping operations.
  • In a study of 68 countries, the Imperial College Business School found that after Indonesia, India has the second highest rate of shadow entrepreneurs.

What are the causes for Rise in Shadow entrepreneurs?

  • High tax rates accompanied by loose enforcement induces tax avoidance, discourage investment in formal businesses, and drive entrepreneurial activity toward the informal sector.
  • Shadow entrepreneurs, offering technology-mediated services, bring complementary services that traditional service providers may be constrained to offer or consumers might not be able to access due to lockdown constraints.
  • Shadow entrepreneurship is also promoted through technology-enabled new markets and also entry of new and tech savvy consumers.

What are the issues with Shadow Entrepreneurs?

  • Small firms will get acquired by large firms. First movers in the space with deep pockets could generate irrationally high valuations.
  • Recent events related to app-based loan providers who charge very high interest rates and dubious methods for recovery.
  • Loss of revenue as these businesses are not registered with the government.
  • They are beyond the reach of law making them vulnerable to corrupt officials.
  • Informal entrepreneurs tend to invest in their businesses much less intensively than the formal ones, which implies that formality is positively correlated with asset size.

What benefits it can have?

  • Increase in employment: Most of Informal sector jobs come under shadow entrepreneurship.
  • Driver of economic development
  • Reduction in Poverty
  • Removes pressure on agriculture by providing non agricultural jobs.
  • Diversified options for consumers

India’s central bank is likely to propose tightening rules on “shadow banks” in a bid to strengthen solvency and sustainability of a sector that has been showing signs of stress in recent years, two sources said. The Reserve Bank of India has been trying to tighten regulatory norms on the sector since Infrastructure Leasing & Financial Services, the largest nonbank financial company, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.