A modern code can rescue us from bankruptcy on job creation
The legal framework governing economic activity in India is of ten out of sync with ground reality . Unintended consequences of laws have created an economy filled with obstructions and delays. The most pernicious outcome of this environment has been a slow pace of job creation at a time when millions of young people are entering the workforce, giving rise to mass youth unemployment.Last week, the government introduced a bill to comprehensively tackle insolvency and bankruptcy proceedings in non-financial firms, an important element in reforming the legal framework.
In terms of significance, this bill is as important as the one on GST to reform India’s economy. Parliament needs to debate and pass this bill in the forthcoming budget session.
Prevailing bankruptcy laws are not only fragmented, they are also discriminatory in the sense that they favour just one set of stakeholders. The upshot is that India is among the slowest in world when it comes to bankruptcy proceedings, a factor which inhibits investment. Another perverse consequence of these laws is that labour intensive economic activity is at a disadvantage when it comes to raising loans as the legal framework favours borrowers with collateral.
The new bill tackles these problems by creating a clean and orderly resolution process. Importantly , the resolution process has a deadline and is unbiased. The result of a new legal framework should be a vibrant bond market and more importantly , an environment that encourages jobs. The new bankruptcy bill, which was introduced in Lok Sabha, was referred to a joint committee with members of both houses. Appropriately , the joint committee has a deadline and is expected to submit its report a week after the budget session of Parliament starts. Apart from other factors, vibrancy in India’s start-up culture needs to be supported through a more encouraging legal framework to raise capital. A modern bankruptcy code is a step in that direction.
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