Bribing and Vulnerability of the Informal Sector in India

This paper attempts to understand bribing in India’s informal business sector. Using World Bank’s informal sector business survey data, 2022, for three Indian states, we find that tax evasion and avoiding formal sector corruption are two primary reasons to continue in the informal sector. However, these reasons are insufficient for paying bribes as a way to stay informal. Businesses that cite these as primary reasons have a lower probability of bribing to continue operations in the informal sector. Instead, the probability of paying bribes is higher for those businesses that cite ease of registration and lack of knowledge & information about the registration process as one of the challenges in transiting to the formal sector. We also find that businesses with sales vulnerability and financial constraints have a higher probability of bribing to remain informal. To this view, policy focus should be on simplifying registration processes and spreading awareness and benefits of becoming a formal sector, which is in line with the theory of firm growth. Long-term investments that focus on improving the education and skills of informal owners and curb corruption should be considered.