Rise of Shadow Entrepreneurship
Updated: Mar 27
Shadow entrepreneurs are those 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. Shadow entrepreneurship is a key factor affecting economic development, both in a positive and negative sense.
Moreover, India has one of the highest numbers of shadow entrepreneurs in the world and with a rising gig economy, understanding shadow entrepreneurship becomes incredibly important. The global rise of shadow entrepreneurship, not just in education but other sectors such as finance (for easy loans), the betting economy (online games), and healthcare (e-pharmacies).
Why Rise of Shadow Entrepreneurship?
When there are a supply and demand shock as momentous as COVID-19, a new market may open up to tackle the shifting inwards of markets, owing to rising prices and lower quantities available.
Presently, India’s manufacturing sector is unable to provide adequate formal employment opportunities to the youth. Moreover, there is a mismatch between education and job skills in the market. So. the phenomenon of shadow entrepreneurship is seen as a potential driver of job growth and economic development.
Shadow entrepreneurs can help release the associated distortions and frictions in the market. They can offer complementary services that traditional service providers may be constrained to offer or consumers might not be able to access.
Challenges in Shadow Entrepreneurship
As Shadow Entrepreneurship is largely unregulated, it provides little job security and few benefits to its workers like social security, insurance, etc. Therefore, it is an extension of India’s informal labor, which has been prevalent for a long time and has remained unregulated.
Shadow Entrepreneurship results in loss of tax revenue, unfair competition to registered businesses, and also poor productivity - factors that hinder economic development.
Further, as the Shadow Entrepreneurship businesses are not registered, it takes them beyond the reach of the law and makes shadow economy entrepreneurs vulnerable to corrupt government officials.
Shadow Entrepreneurship may also have cross-border and national security implications. For instance, the recently reported suspicious loans being provided by Chinese instant loan providers online.
It will also mean that unscrupulous individuals who are not entrepreneurs but are complementary service providers will potentially take more advantage of these post-pandemic market constraints, extracting money from consumers by means such as document forgery.
Strong monitoring of quality would be essential.
This needs to be complemented with non-compliance being punishable with a jail term, clamping down on services, and related strict consequences.
Those shadow firms that comply are more than welcome to join the dominant mode of service delivery with non-shadow firms.
But without regulation, the situation could spiral out of control, given monitoring needs of public goods distribution for the developing world.
There also needs to be an associated harmonization of activities between competition authorities of governments (in India’s case the Ministry of Corporate Affairs in regulating shadow entrepreneurship and government departments in healthcare, education, or finance).
Shadow entrepreneurship may temporarily tackle issues like the unemployment crisis or market gap but given monitoring needs of public goods distribution for the developing world, without regulation, the situation could spiral out of control. There is a need for the government to step in and implement radical changes in labor laws or implement tax rebates and concessions that can be passed on directly to drivers or delivery partners as health or insurance benefits.
There is a large shadow economy literature mainly arguing that the share of the informal activity is a function of the tax and enforcement policies.