THE CHAKRAVYUH CHALLENGE

What is meaning of  “chakravyuh” challenge which exits in Indian Economy ?

• FROM SOCIALISM WITHOUT ENTRY TO ‘MARKETISM’ WITHOUT EXIT

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.

Since LPG reforms of 1991 our entry barriers in the economy has been reduced through following:

• De-licensing, de-regulation, reduction in role of Public Sector Enterprise, Privatization
• Liberal FDI norms
• Reduction in trade barriers.
• However, exit impediments have continued. This has been described as transition from Socialism with restricted entry to “Marketism” without Exit.

Magnitude / Severity of the Problem

• Ideally productive and innovative firms should expand & force out unproductive ones. So, serving ones should be larger than new ones.
• However, compared to USA and even Mexico, Indian firms are merely 1.5 times larger than newer ones on an average.
• Further, India has disproportionately large share of inefficient firms with low productivity showing exit impediments.

Cost of impeded exit

• Fiscal cost: Govt supports sick and inefficient industries through subsidies (like bailouts) or through loans, tariffs etc. This increases borrowing by the government causing increase in fiscal deficit leading to increased interest rate & “crowding out” of private sector.
• Economic cost:
• Vast pool of both human and capital resources are not put to best use, which comes as an opportunity cost to the economy.
• It also provides consumers with inferior products at higher costs
• Leads to rising NPAs and stressed balance sheets of lending banks.
• Political cost: trying to bail out such firms is seen as favouring the rich & corporate affecting political appeal of the govt.