Economic Survey: Govt taking steps to facilitate 'exit' for failed ventures

New Delhi: Likening the Indian economy in the 21st century to the Charkravyuha legend of the Mahabharata -- the ability to enter but not exit -- the Economic Survey 2015-16 today 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 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 Charkravyuha 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.

India has made great strides in removing the barriers to the entry of firms, talent, and technology into the Indian economy. Less progress has been made in relation to exit. Thus, over the course of six decades, the Indian economy moved from 'socialism with limited entry to "marketism" without exit', it added.

"Impeded exit has substantial fiscal, economic, and political costs," the document added.

Spelling out steps taken up by the government to address the issue, it said a number of solutions to facilitate exit are possible, including "new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act as well as the broader JAM agenda.

These hold "the promise of facilitating exit, and providing a significant boost to long-run efficiency and growth", it added.

Elaborating on the magnitude of the problem emanating from difficulty to exit, the survey said there is not much of a gap between surviving firms and unproductive ones in India contrary to the principle that productive and innovative firms should expand and grow, forcing out the unproductive ones.

"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 India the average 40 year old plant was only 1.5 times larger than a new one," it said.

Stating that the situation has worsened over the years in India, it said there are not enough big firms and too many firms that are unable to grow, the latter suggesting that there are problems of exit.

With start up becoming the flavour of the season, the survey said it is important that start ups too see "exit" which could take the form of these companies being listed, allowing the original private investors to cash in on the initial investment and plough it back into other similar ventures.

"Exit valuations in India are still low but are expected to increase as the impact of new SEBI policies on listings comes into effect and as equity markets in general revive from current low valuations caused by a sense of gloom in the global economy," it said.