Economist Arvind Subramanian Highlights India's Shift to 'Capitalism Without Exit'

Economist and former Chief Economic Advisor to the Government of India, Arvind Subramanian, recently articulated a critical observation regarding India's economic trajectory, stating that the nation has transitioned "from socialism with limited entry to capitalism without exit." This sharp critique, highlighted by Fahad Hasin on social media, points to persistent structural issues within the Indian economy despite decades of liberalization. Subramanian's remarks underscore challenges in fostering dynamic market growth and efficient resource allocation.

Subramanian's phrase "socialism with limited entry" refers to India's pre-liberalization era, often termed the 'License Raj.' During this period, state control and a complex web of licenses and permits significantly restricted new businesses from entering various sectors, stifling competition and innovation. This system prioritized state-led development and protectionism over market forces, creating significant barriers to market access.

Conversely, "capitalism without exit" describes the current economic environment where, despite eased entry barriers for new enterprises, failing businesses face immense difficulties in ceasing operations, liquidating assets, or undergoing effective bankruptcy proceedings. This dysfunctionality leads to prolonged distress, inefficient capital reallocation, and exacerbates the problem of non-performing assets (NPAs) within the banking sector. The inability of firms to exit efficiently hinders overall economic dynamism.

Speaking at an event, Subramanian explained that while the Insolvency and Bankruptcy Code (IBC) was introduced to streamline corporate insolvency and resolution, its implementation continues to face hurdles. These challenges include judicial delays and complexities in the resolution process, which impede the code's effectiveness in facilitating timely and efficient exits for distressed companies. This structural issue, he noted, acts as a drag on productivity and growth.

The economist's analysis suggests that an efficient exit mechanism is crucial for a healthy capitalist economy, allowing resources to be reallocated from unproductive ventures to more promising ones. His comments serve as a call for continued reforms to ensure that India's economic framework supports not only market entry but also a robust and efficient system for corporate exits, thereby fostering genuine market-driven growth.