Answer:

A market economy requires unrestricted entry of new firms, new ideas, and new technologies so that the forces of competition can guide capital and labour resources to their most productive and dynamic uses. But it also requires exit so that resources are forced or enticed away from inefficient and unsustainable uses. Over the course of six decades, the Indian economy has moved from ‘socialism with limited entry to “marketism” without exit’.

Since the early 1980s, the Indian economy has made remarkable progress in increasing entry: industrial licensing has been dismantled, public sector monopolies have been diluted, some public sector assets have been privatised, foreign direct investment has been considerably liberalised and trade barriers have been reduced. However, there has been less progress in relation to exit and impeded exit has been resulting in substantial fiscal, economic and political costs.

Associated costs

♤ Fiscal costs: Exit is impeded often through government support of incumbent, mostly inefficient, firms. This support – in the form of explicit subsidies (for example, bailouts) or implicit ones (tariffs, loans from state banks) – represents a fiscal cost to the economy.

♤ Economic costs: Economic losses result from resources and factors of production not being employed in their most productive uses. In a capital scarce country such as India, misallocation of resources can have significant costs. Another cost, in the current context, stems from the overhang of stressed assets on corporate and bank

balance sheets. The consequence is a reduced flow of new investment, dampening medium term growth.

♤ Political costs: The lack of exit can have considerable political costs for governments attempting to reform the economy. The benefits of impeded exit often flow to the rich and influential in the form of support for “sick” firms. This can give the impression that governments favour large corporates, which politically limits the ability to undertake measures that will benefit the economy but might be seen as further benefitting business.

In India, the exit problem arises because of three types of reasons, what might be

called the three I’s: interests, institutions, and ideas/ideology.