Measures on the way to ease exiting of failed companies
The lack of exit options is adding to serious economic cost, as mis-allocation of resources can have significant impact for India, a capital-scarce country. Another cost stems from the overhang of stressed assets on corporate and bank balance sheetsunion budget Updated: Feb 27, 2016 00:29 IST
Equating the Indian economy in the 21st century to the ‘Chakravyuha’ legend of the Mahabharata — which Abhimanyu could enter but not exit — in the opening chapter of the Economic Survey for 2015-16, the government on Friday cautioned that the country is facing adverse consequences due to the lack of a way out for failed ventures.
The Survey, tabled in Parliament by finance minister Arun Jaitley on Friday, said the government is looking to facilitate exit through a host of initiatives, including the new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act as well as the broader JAM (Jan Dhan, Aadhaar and Mobile governance) agenda.
“The Chakravyuha legend from the Mahabharata describes the ability to enter but not exit, with seriously adverse consequences. It is a metaphor for the workings of the Indian economy in the 21st century, the legacy of several decades of economic policy-making,” the survey said.
“Over the course of six decades, the Indian economy moved from ‘socialism with limited entry’ to ‘marketism without exit’.”
“Impeded exit has substantial fiscal, economic and political costs,” the pre-budget document said. The fiscal cost of impeded exit is an “increasing function of the taxes that will have to make up for the lost revenue, and/or the general equilibrium effects of greater deficits, via the greater interest costs and reduced private sector investment activity that result if the government borrows to finance the foregone revenue.”
The lack of exit options is adding to serious economic cost, as mis-allocation of resources can have significant impact for India, a capital-scarce country. Another cost stems from the overhang of stressed assets on corporate and bank balance sheets.
This can give the impression that governments favours large companies, which politically limits the ability to undertake measures that would benefit the economy — but might be seen as further benefiting businesses, it added. “Similarly, if wilful defaulters cannot be dealt with appropriately, the legitimacy of a market economy and the regulating institutions can be called into question.”
“In the US the average 40-year-old plant is eight times larger (in terms of employment) than a new one. Established Mexican firms are twice as large as new firms. But in 2010 in India, the average 40-year-old plant was only 1.5 times larger than a new one,” it said.
The lack of exit options is a problem particularly for the startup sector, it added.
“Exit valuations in India are expected to increase as the impact of new Sebi policies on listings comes into effect, and equity markets revive.”