Reserve Bank of India Governor Raghuram Rajan, who is now leading the RBI initiative of cleaning up banks’ balance sheets, on Thursday said promoters benefited while resolving distress in large firms. On the other hand, laws applied more quickly to small firms.

Rajan said there’s still uneven playing field in distress. “Resolving large firms is very difficult… with workers as pawns. The courts focus on revival rather than resolution. While promoter benefited, its hard for debt to recover money,” he said while delivering the Nani Palkhivala memorial lecture here.

Highlighting the bias towards big firms, Rajan said, “laws applied more quickly to small firms… sometimes with a bias to creditors. Laws become more draconian to give creditors powers. However, operational and speedy bankruptcy code will level the playing field.”

The government and regulators are needed to set the rules of the game and enforce behaviour, he said. “Biased government/regulation distorts the playing field. It’s not that there should be no handicaps but not unequal handicaps,” he said.

Rajan also proposed a basic safety net in the country focussing on people so that free enterprises can flourish and people can take risks.

Stating that competition can be ruinous despite one’s best efforts, Rajan argued for a basic safety net, not focused on firms but on individuals, which should not be prohibitively costly for the government and can be incorporated into Budget liability projections. This safety net can include unemployment insurance, basic healthcare and old age pensions, he said.

“Insurance is not explicit, it will be implicit in a democratic society. Safety net can also encourage people to take risks they would shy away from otherwise,” Rajan said. Free enterprise and competition combat prejudice and social biases, the RBI governor said.

“India has come a long way in encouraging free enterprise. From tiny shops to large internet start-ups, the spirit of entrepreneurship is alive. Graduates increasingly want to start businesses or work for start-ups rather than go to an established consultancy or bank,” Rajan said. “Doing business is more reputable, as is getting rich. But a lot more work is needed to improve the environment so that everyone has a chance.”

Rajan listed four conditions for free enterprise to be politically viable: Level playing field with easy entry and exit, protection of property rights, broadening access to capabilities and a basic safety net.

According to Rajan, rather than looking for special dispensations, business has to push for improving the business environment for everyone. “Glad business associations are increasingly doing this. As Palkhivala said, India always seems to find the way, perhaps not quickly and not linearly, but in due course.”

He said aam aadmi attaches no value to free enterprise if he cannot participate. “Increasingly, enterprises of the future require employees to have decent education and health. Malnutrition curses an individual for life, as does poor early education. Effective delivery of social programmes, so that everyone has the ability to compete, is absolutely necessary,” he said.

“We have our weaknesses and our excesses, but our democracy is self-correcting, and even while some institutions weaken, others come to the fore. India’s is a dynamic society, ever changing, ever rejuvenating. Indeed, the possibilities for free enterprise in India today are probably better than ever before in its history,” Rajan said.

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