The word “Chakravyuha” in Chakravyuha challenge is taken from the legend of Mahabharata which means “the ability to enter but not exit”.
After independence and till the 1980s, India was a socialist economy and suffered “ licence-quota-permit Raj” with a restricted “entry”.
Since the early 1980s, the Indian economy has gradually moved to a market economy and made a remarkable progress in overcoming its entry barriers but in the process, it has given rise to another major problem i.e. of an “exit”.
Reasons for an “Exit” problem in India
In India, the exit problem arises because of three types of reasons, what might be called the three I’s: Interests, Institutions, and Ideas/ Ideology.
- Interests: The first and the most powerful reason is the vested interests of producers. With their powerful voice and financial backup they disproportionately influence the democratic political systems and do not let the profit to flow to the diffused consumers.
Ex: When JAM was introduced for MNREGA expenditure to reduce leakages, a perception was tried to be created that the program was mostly negative.
- Institutions: The second reason is the abundance of strong and weak institutions in India which creates another hurdle in a timely exit.
Ex: Weak institutions such as Debt Recovery Tribunals (DRT) creates unnecessary delay in settling disputes and thus prevents the cleaning up of balance sheets of both the banks and the corporate sector.
A strong institution, on the other hand, favors abundant caution and status quo thus promotes indecisiveness.
- Ideas/ Ideology: (After Independence) India is a developing country with sizable poverty and inequality based its economy on the ideology of state-led development and socialism. To overcome the stark inequality it promoted redistribution through many government initiatives and entitlements. Once initiated it became very difficult to phase out these entitlements mainly due to democratic nature of Indian polity and populist governments.
The cost of impeded Exit
The lack of exit creates at least three types of costs: fiscal, economic (or opportunity), and political.
- Fiscal costs: Due to impeded exit, the government is forced to support the inefficient firms. This support—in the form of explicit subsidies (for example bailouts) or implicit ones (tariffs, loans from state banks not only leads to reduced government expenditure on other developmental activities but also limits the private sector investment by increasing interest costs.
- Economic costs: Economic losses occurs due to two reasons :
- Inefficient use of resources and factors of productions.
- The overhang of stressed assets on corporate and bank balance sheets thus reducing the flow of new investment and dampening medium term growth.
- Political costs: Repeated bailouts and extended loans to sick industries give an impression that government favors large corporates. It can result in political instability.
Exit problem also hinders the economic reforms of a country.
Addressing the Chakravyuha challenge
Chakravyuha challenge can be addressed in at least five possible ways:
- Avoid Exit through liberal entry of private sector: Instead of eliminating inefficiency, competition can be promoted via private sector entry. This will not only reduce chances of conflict with the trade unions but also bring structural and functional change in the working of the loss making industry.
Ex: Using this method, the exit problem in the civil aviation and telecommunication sectors has been skirted.
- Direct policy action: The problem of weak institutions can be addressed through better laws
Ex: Insolvency and Bankruptcy code, 2016.
The problem arising from overly strong institutions can be addressed by empowering bureaucrats and reducing their vulnerability.
- Use of Technology: Technology can help in two ways. First, it can bring down human discretion and the layers of intermediaries. And, second, it can break the old shackles and old ways of doing business. In both ways, it can contribute directly to finding solutions to the exit problems.
- Transparency: By communicating with the people and telling them the pros and cons of some of the entitlements, efficiency can be brought in public delivery of goods and services.
Ex: Overproduction due to MSP can be addressed by throwing light on the social and environmental cost of cereal production.
- Exit as an opportunity: By making employees and managers realize the benefit of exit, confrontation can be avoided and new efficient industries can be developed to replace the same.
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