The Economic Survey 2015-16 compared the Indian economy with Chakravyuha from epic Mahabharata as one could enter but not exit.The survey stated that even though barriers were removed from entry for firms, talent, and technology, less progress was made in relation to exit.
"Over the course of six decades, the Indian economy has moved from socialism with limited entry to marketism without exit," the survey adds.
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"India seems to have a disproportionately large share of inefficient firms with very low productivity and with little exit. This lack of exit generates externalities that hurt the economy," says the survey.
For instance, in fiscal costs, inefficient firms often require government support in the form of explicit subsidies or implicit subsidies.
It also have political implications as government support to "sick" firms can give the impression that government favors large corporates.
The Economic Survey analysed there were 3 I’s in exit problem
1. Interests: The power of vested interests confers greater power on concentrated producer interests in relation to diffused consumer interests. As a result it becomes difficult to phase out schemes and they become instruments of granting favors.
2. Institutions: Weak institutions increase the time and financial costs of exit. For example, with rising non-performing assets, recourse to debt recovery tribunals (DRTs) has increased. The share of settled cases is becoming small and declining and the accumulated backlog of unsettled cases has increased manifold. Furthermore, inability to punish wilful defaulters questions the legitimacy of all institutions.
3. Ideas/Ideology: The founding ideology of state-led development and socialism makes it difficult to phase out entitlements even as those intended for the poor end up accruing to the relatively better off.