Current Affairs > General Studies

economic survey notes - vol1- ch2 07-05-2016

Chakravyuha - INDIA is able to address the entry problem in the market economy by and large but the exit problem for the companies is still high. India moved from socialism with restricted entry to marketism without exit.

Exit – challenges

  1. 1.     Many a time’s lack of exit generates externalities that hurt others.

A)    Corporate subsidies

B)     In efficient systems will lead to substandard services that can hurt consumers and economy at large

C)     India twin balance sheet challenge is a manifestation of exit problem

Note – twin balance sheet challenge

D)    The challenge is more with traditional sectors of Indian economy

E)     Exit problem is not restricted to public sector alone and is prevalent in private sector too

F)     the problem has worsened over years. ( bloom and Van reenen, see graph 1 and 2)

G)    Lack of exit costs three types of costs – fiscal, economic and political –

1)     Fiscal – Bail outs, loans from public sector banks leading to stressed assets

2)     Economic – misallocation of resources

3)     Political – Government ends up supporting rich and it appears Government benefitting the rich

H)    Relatively well off benefits more than poor.

Why there is an exit problem?

1)     Interests –

  • Powerful vested interests – Lobbyists. Vested interests create a market for themselves. There are powerful producers who have greater interest in continuing the system compared diffused consumers who gets benefitted from the change. It is an imbalance of power between concentrated losses and diffuse benefits.


  • Bureaucratic inertia – it perpetuates the longevity of the programs in spite of losing their relevance.


2)     Institutions –

  • Weak institutions – ex – Debt recovery tribunals, inability to punish wilful defaulters.
  • Strong institutions with excessive Bureaucratic caution and hence status Quo. Ex- public sector bank managers fear to write off the loans for fear of being seen as favouring corporate interests. This is leading to ever greening of loans and postponement of Exit. Fear of 3Cs in India is a typical example over here.

3)     Ideas and ideology

  • State led development and socialism – ex - MSP
  • Sanctification of the small – incentives to remain as small.

Addressing the problem

1)     Avoid exit through liberal entry – liberal entries to Private sector will lead to competition. Over a period of time role of the public sector is significantly reduced – ex – telecom sector

2)     Direct policy action – some of the problems of weak institutions can be directly addressed through better laws. Ex –

  • Bankruptcy law
  • Empowering Bureaucrats and reducing their vulnerability – Prevention of corruption act need to be amended to protect the honest Bureaucrat.
  • Implementation of Kelkar committee recommendations on PPP issues.
  • Establishment of independent sector regulators.

3)     Technology and JAM solution

  • In relation to the reduction in leakages related to  subsidies in Agriculture, fertilisers, food  - DBT (direct Benefit transfer) through use of JAM

4)     Transparency

  • Explaining the social and environmental costs of production of resource intensive crops.
  • Analysing the real beneficiaries of Government subsidies to all citizens.

5)     Exit as an opportunity

  • Resources earned from privatisation of Public sector enterprises can be used for the benefit of employees.
  • Land banks of the Public sector enterprises can be used to develop eco systems for start ups.


Anti corruption law and policy paralysis

Section 13(1)(d)(III) of Prevention of corruption act states that


`A public  servant  is  said  to  commit  the  offence  of  criminal  misconduct  if  he,  while  holding  office  as  a  public servant,  obtains for any person any valuable thing or pecuniary advantage without any public interest.


According to this any judgement that causes a pecuniary advantage with out any public interest can be a corruption. Guilty intent need not be established by the investigating agencies. I An error of judgement with out any wrong intention can also be punished.)

Investigating agency need not establish any direct benefit to the decision maker. 


Improving the investigation mechanism and making the prosecution to establish personal gains and wrongful intent will decrease the fear of allegations of corruptions.


Eco survey recommends that

 Government  to set up a Commission to recommend  a  new  prosecutorial  policy  for the  offence  of  corruption  which  balances  the  need  for  probity  with  the  need  for  bona  fide  decisions  to  be  taken without  fear  of  false  allegations  of  corruption.  The Commission should also recommend  measures to improving the capacity of both the investigative  agencies  and the public prosecutors. It is crucial  that the Commission have the resources needed to  access international expertise.


The vigilance officer system that is widely felt to be ineffective need to be replaced.



See table 1


Initiatives on entry side

Initiatives on exit side

India’s Insolvency and Bankruptcy Code,

It may soon win parliamentary approval, would significantly strengthen the hand of banks in resolving a $100 billion bad loan headache.


Experts caution, however, that it would take years to train up a new class of insolvency professionals and compile debt records.


Here are some of the highlights of the bankruptcy code:

Unified Bankruptcy Code

The government plans to repeal an ineffectual, century-old insolvency law and amend 11 laws currently dealing with defaulters.

Once fully implemented, the code would seek to speed up debt recoveries and restructurings by setting a deadline of 180 days to decide the fate of a company that defaults.


The code will apply to companies, partnerships, limited liability partnerships, individuals and any other body specified by the government.

Insolvency Resolution

For individuals the process could be initiated either by the debtor or the creditors.

For companies, the resolution process will have to be completed within 180 days, with an extension of up to 90 days if 75 percent of creditors agree.

The process will involve negotiations between the debtor and creditors to draft a resolution plan. If they agree, the plan could be submitted to the authority. If no agreement is reached, the company would automatically go into liquidation.

The process will be managed by a licensed insolvency professional who will also control the assets of the debtor during the process. The code plans to set up information utilities to collect, collate and disseminate information to facilitate insolvency proceedings.

Insolvency regulator

The insolvency regulator would have representatives from government and the central bank, and oversee and regulate insolvency agencies.


The National Company Law Tribunal would under the code address grievances relating to insolvency, bankruptcy and liquidation of companies. Debt Recovery Tribunals would deal with individual cases.

Their decisions could be challenged in appellate tribunals and before the Supreme Court.


A debtor could be jailed for up to five years for concealing property or defrauding creditors.



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