"India is today more liberalised with respect to entry than even some developed countries. However, less progress has been made in relation to exit". Elaborate.

2/17/2017| Views(208 ) | Writing Structure |Qchat

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  •  Government has taken various initiatives & policy measures like from LPG reforms in 1991 to recent flagship programme of "Make in India", Start Up India, Mudra Bank, etc to facilitate the entry of new firms, new ideas, new technologies & new entrepreneurs, however, least has been done to make the exit easy.
  • Impeded exit has substantial fiscal, economic, and political costs. The barrier to exit is not only exists in public sector and manufacturing, but the private sector and agriculture also.
  • Various permission & approval from regulatory bodies are required for closing a firm. There is no comprehensive bankruptcy law in existence, multiple laws governs the process. This cause huge delay in final closing of unviable business. Impact is deterioration of assets, loss of market opportunity, locking of capital & loss of investors' confidence.
  • If the locked capital in loss making units could be released easily, it could go to profit making ventures, for example, a VCD making firm which was profitable and promising 10 years has no future, due to arrival of alternate media in form of pen-drives. If we would not allow the firm involved in CD production to close the unit, how would he be able to invest in a profitable venture of today, say pen-drive.
  • But it is not allowed in most cases, because of archaic labor laws, which require golden handshakes and golden parachutes. Similarly, the entrepreneurial talent is lost in red-tape meanwhile. Apart from these issues, sometimes closing down a unit is not possible, because it provide a service which large number of people use, for example; a) If problem is analyzed with respect to Public sector, fertilizer manufacturing firms are most affected by it. Subsidy to farmers which predominantly benefits large farmers-cannot be reduced/ eliminated, because of exit problem, as it would contain political costs. ; b) Many central organizations like BSNL, Air India were running in heavy losses for quite a long time & government is paying hefty amount of public money to keep these running. Due to political & policy reasons, government is not able to close them down. Most important of them is employees' concern and protest.
  • However, a number of solutions to facilitate exit are possible. The government's initiatives including the new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act as well as the broader JAM agenda hold the promise of facilitating exit, and could provide a significant boost to long-run efficiency and growth.
  • As per TK vishwanathan committee, the easy exit option will give the entrepreneurs a viable choice to start. However the investment climate would also get a boost and would further strengthen the stability of the economy.

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