1.4 Informal South Asian Firms Are Predominantly Microenterprises

FIGURE 1.4 Informal South Asian Firms Are Predominantly Microenterprises

Sources: based on tables published in government reports on bangladesh Economic growth institute census (2009) microdata and the Nepal Economic Census (2018). Note: The bangladesh Economic growth institute census covers only urban locations in 19 districts. registration in the Economic growth institute census refers to firms registered for a trade license with a municipality. registration in the Nepal Economic Census refers to any type of registration with a government agency.

10 workers are required to register. They do so by pooling data from the Annual Survey of Industries, which captures factories registered under this Act, with that from the National Sample Survey Office survey of unregistered factories.20 Factories that appear in the latter survey (and are therefore unregistered), but that have more than 10 workers, must be evading the act, while some of those that are slightly below the regulatory size threshold are likely avoiders. By this estimate, only 1.5 percent of all manufacturing firms are evaders and fewer than 1.0 percent are avoiders.21 About 97 percent of factories appear to be outsiders.

Firms in the informal sector also appear to differ in the extent to which they perceive the benefits of formalization. For example, in Bangladesh, informal firms employing more than five individuals are more likely than firms with fewer than five individuals to perceive benefits from tax formalization (figure 1.5). The differences in the perceived benefits from tax registration are most evident in regard to access to credit and the attainment of a greater scale in operations. While neither of these groups perceive a significant benefit in terms of access to export markets or government programs or of better contract enforcement, the gaps between smaller and larger informal firms are sizable. These patterns are consistent with the idea expressed in the framework of the analysis here that naturally smaller firms may have less to gain from formalizing.

There is substantial heterogeneity in revenue per worker within the informal sector and between the formal and informal sectors. In India’s manufacturing sector,