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A great churning

Reforms are needed to pave the way for the exit of weak firms so that labour and capital can move to healthy ones

Ajay Shah

High- and low-productivity firms manage to coexist in India when low-productivity firms cheat on compliance. To the extent that a sound GST improves compliance, many low-productivity firms will exit. A sound GST will also disrupt many vertically integrated firms and we will see more trades between specialised industries. The banking crisis has slowed the traditional ways of ever-greening, which keeps zombie firms aloft. RBI reforms, the Insolvency and Bankruptcy Code (IBC), and the resolution corporation will help shift capital from weak firms to healthy firms. These factors suggest that a ...