Indian Economy making great strides in removing barriers to entry for firms, talent, and technology but less in relation to exit
The Economic Survey 2015-16 presented here today in the Parliament by the Union Finance Minister Shri Arun Jaitley invokes the legend of the Charkravyuha from the Mahabharata describing the ability to enter but not exit, with seriously adverse consequences. The Indian economy has made great strides in removing barriers to entry for firms, talent, and technology but less progress has been made in relation to exit. Thus, over the course of six decades, the Indian economy has moved from ‘socialism with limited entry to “marketism” without exit’.
The Economic Survey 2015-16 states that the case studies suggest that the challenge is more a feature of the relatively traditional sectors of the economy. It is not restricted to the public sector but is increasingly being seen in the private sector. India seems to have a disproportionately large share of inefficient firms with very low productivity and with little exit. This lack of exit generates externalities that hurt the economy.
Impeded exit has substantial fiscal, economic, and political costs.
The Economic Survey analyses this exit problem with the help of the three I’s:
The Economic Survey 2015-16 suggests five possible ways to address this problem. The first is promoting competition via private sector entry rather than change of ownership from public to private. Secondly, direct policy action through better laws like the Insolvency and Bankruptcy Code 2015 will expedite exit. Also institutions need to be made stronger but flexible by empowering bureaucrats and reducing their vulnerability. Thirdly, increase the use of technology to remove persistent distortions by bringing down human discretion and layers of intermediaries. The fourth is increasing transparency and highlighting social costs and benefits of various schemes and entitlements. Finally, showcasing exit as an opportunity towards a newer and better tomorrow.