Source: BS
Context:
The International Monetary Fund (IMF), in its recent staff report on the Indian economy, highlighted structural inefficiencies in India’s business environment, low business dynamism, and issues in the insolvency resolution framework under the Insolvency and Bankruptcy Code (IBC) Amendment Bill. The report emphasised the prevalence of zombie firms and gaps in operational creditor rights.
Low Business Dynamism
- Entry and exit rates of firms in India are below 1%, far lower than 8–13% in US, Europe, Korea, and Chile.
- Low entry rates partly reflect high regulatory compliance burdens.
- Overall, India shows structural rigidities, discouraging formal sector participation.
Persistence of Zombie Firms
Zombie Firms are businesses that continue to operate but are financially weak and unable to generate enough profits to cover their interest payments for a prolonged period.
- 15% of continuously operating firms qualify as zombie firms:
- Do not generate enough earnings to cover interest expenses.
- Operate at low productivity levels.
- Causes include:
- Forbearance lending
- Inefficient insolvency resolution
- Limited exit mechanisms for non-viable firms.
IBC Amendment Bill Gaps
- Operational creditors still lack the right to vote on resolution plans.
- No rules for executory contracts, limiting the possibility of restructuring ongoing business operations instead of outright sale.
- Anticipated to expedite bankruptcy resolution, but gaps remain in governance and operational efficiency.
Recovery Rates and Pre-admission Delays
- Recovery rates for financial creditors declined:
- From 43% in March 2019 → 33% in June 2025.
- Pre-admission delays (filing to case opening) worsened:
- Operational creditors face an average wait of 650 days in 2022 vs 450 days in 2019.
Recommendations by IMF
- Complement legislative reforms with:
- Strengthened judicial capacity via dedicated tribunal benches.
- Adequate funding for tribunals.
- Operationalisation of the personal insolvency regime.
- Improve credit allocation to redirect resources from low-productivity to high-productivity firms.
