18 August 2014

More Good Advice for the Prime Minister of India

Go here to read an article in the Hindustan Times reporting on the pleas by one of the directors of the Reserve Bank of India (the equivalent of a combined U.S. Federal Reserve Bank and Federal Deposit Insurance Corporation) for enactment of a bankruptcy code in India. I've made the same plea for years (here, here, here, and here) but to no avail. The former Congress-led coalition government wasn't paying attention. Perhaps, however, the more business-minded BJP majority will listen.

Seriously, a market economy needs a system by which to move assets from entities that are losing money to ones that can deploy them in more productive ways. Business bankruptcy is not "moral" in the commonsense way morality is commonly taken. Business bankruptcy is primarily about efficiency--producing more as cheaply as possible. A market economy is well-tuned when as many people as possible can satisfy as many of their subjective desires as possible (backed by money, not force). Whether a market economy produces a virtuous people can be doubted.

What can't be doubted is that India has moved past its constitutional preambulatory statement that it is a "socialist republic." Socialist countries didn't need bankruptcy for business firms, or so it was thought. (China is proving that even nominally socialist countries need a system of bankruptcy but that's a story for another day.) Market economies most certainly need a transparently legal mechanism by which to take ownership of firms away from those whose competence has been tried and  found wanting by the market.

Bankruptcy also has the salutary effect of getting nonperforming loans off the balance sheets of banks, which is why the RBI cares about the problem. Underperforming businesses are bad for the economy. Nonperforming loans to underperforming businesses are bad for banks. Bad banks are bad for a nation's fiscal and monetary system, which is bad for the economy, Etc.

Here's hoping Prime Minister Modi reads my blog.

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