India has made great strides in removing the barriers to the entry of firms, talent and technology into the Indian Economy. But less progress has been made in relation to exit, the survey said this is acting as a drag on the economy, particularly in the public sector.

The miracle Chinese Economy too has slowed down to slide to below 7 per cent growth making India the fastest growing economy in the world. The sweet spot might not lost if calibrated reforms are not pursued. This is necessary to ensure that Indian Economy is “fortified” against possible spillovers of an unusually volatile external environment. If the World economy lurches into crisis or slides into further weakness, Indian's growth will be seriously affected, warns, the Economic Survey, presented to Parliament on February 26.

During the last one year, India has brought about macro-economic stability during the last one year with Inflation being reined-in despite drought for two consecutive year, fiscal deficit contained to 3.9 per cent this financial year, foreign exchange reserved swelled to about $350 billion and current account deficit below one per cent of GDP. All these have happened partly because of sharp fall in global commodity prices due to economic slowdown. The steep fall in global crude oil prices greatly helped India to rein-in fiscal deficit due massive over Rs 75,000 crore savings on oil subsidies. This also resulted in current account deficit falling below one per cent of GDP. Though India's exports declined sharply, imports too declined as crude oil imports accounting for over $120 billion fell sharply as well as imports of other commodities whose prices have fallen sharply like coals, cement, steel and so on. Gold imports too fell, partly because of falling prices. Strangely India's remittances by NRIs have not fallen despite dramatic decline in oil prices impacting oil producing countries in West Asia where large number of Indians work helping the foreign exchange reserves to swell.

Indian Economy might have made substantial improvement in its macroeconomic fundamentals in 2015-16. The Survey also points out that the impressive strides have been made in reducing macro-economic imbalance with reforms in key areas. Though the growth prospects look reasonable, there are several downside risks due to weak global demand. Hence GDP growth in 2016-17 will fall short of its growth potential of 8-9 per cent. This means growth cannot be any better than the projections for this year of 7.5-7.75 per cent.

Since the dismantling of famous licence-quota-permit raj has led to increasing entry of companies, dismantling of industrial licensing and dilution of public enterprises monopolies, and privatisation of some PSU assets, have taken place. All these along with foreign direct investment have led to elimination of entry barriers but on exit front, there has been less progress, the survey argued and said this had led to restricted entry to market without exit. There is an exit problem, which is beyond dispute, the survey said adding there is fiscal, economic and political costs because of impeded exit.

Analysing this problem in detail, the Survey attempts to measure the costs of inefficiency in various sectors and suggests solutions.

In case of inefficient fertilisers companies employing over 15,500 persons, the estimated subsidy on production amounted to Rs 23,000 crore in 2013-14. To minimise the loss , neem coated fertilisers and direct benefit transfer of subsidy to farmers would help.

In the civil aviation sector, the total loss was Rs 2,400 crore in 2013-14 for the seventh straight year and the answer lay in strategic sale of Air India, the survey hinted. Public sector banks, which needed capital infusion of over Rs one lakh crore, the solution to deal with the problem lay in bank consolidation that is merger, strategic disinvestment,, resolution and reforms, besides recognising the huge nonperforming assets problem. For state electricity distribution companies, which have accumulated losses of over Rs 2.3 lakh crore in 2013-14, the solution lay in structural reform with one time debt relief as in UDAY and creation of “one marker” in power.

As far as central public sector undertakings are concerned, the accumulated losses of sick public sector undertakings totalled RS 1.04 lakh crore in 2013-14 and the solution lay in allowing sick central public sector undertakings to exit. Besides the government can leverage the land so that the capital is unlocked for new investments. But it is not clear how this could be implemented as it may need political consensus.

In many cases where public sector firms need to be privatised, the problems of exit arise because of opposition from existing managers or employees' interests. But in some instances, such action can be converted into opportunities. For example, resources earned from privatisation could be earmarked for employee compensation and retraining.

It notes most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the 'Make in India' and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.

The government in the past successfully implemented this experiment with sick and closed NTC mills in urban locations like Mumbai and elsewhere where it monetised the huge land the mills had in prime locations to clear the debt and for payment of arrears to workers. Setting up of industrial clusters would encourage large number of small and medium enterprises, which in turn would lead to much needed job creation.

Since 1991, an overarching principle for eliminating inefficiency and addressing the exit problem in vast parts of the economy has been to promote competition via private sector entry rather than change ownership through privatization.

This approach had some “intrinsic” merit as Russia suffered from trying to privatize assets, which ended up in the hands of the the so-called oligarchs. Also entry favoring approach had the virtue of political expediency. The Indian aviation and telecommunication sectors are examples where allowing private sector companies to enter the market without touching the public sector incumbents bypassed these costs. The logic was that a vibrant private sector would grow.

That way, exit policy is a necessity in the liberalized world to clean up balance sheet of ailing companies particularly in the public sector. The Bankruptcy law, now pending in Parliament, will perhaps pave the way towards this end when the law is passed and implemented. The problem is known and so also the solution but the question is will it get implemented with the political will it needs. Going by the experience of past 25 years since liberalization, this is not going to be an easy task. (IPA Service).