Zombie firms that persist beyond their economic viability pose a systemic risk to productivity and capital allocation." In the context of India's manufacturing sector, examine this

GS3 Indian-Economy
Zombie firms that persist beyond their economic viability pose a systemic risk to productivity and capital allocation." In the context of India's manufacturing sector, examine this statement and suggest institutional reforms to address it.

Examine

  • 15 marks
  • 8 min
  • 250 words
  • Medium

The Hindu

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Introduction

“Zombie firms” refer to economically unviable companies that continue operating despite persistent losses and inability to service debt, often surviving through repeated refinancing, regulatory forbearance, or state support. In India’s manufacturing sector, the persistence of such firms distorts market efficiency, weakens productivity, and hampers optimal capital allocation. As India aspires toward a manufacturing-led growth model under the Viksit Bharat 2047 vision, addressing the zombie firm phenomenon has become increasingly important.

Zombie Firms as a Systemic Risk in Manufacturing

Misallocation of Capital

  • Banks and financial institutions continue lending to inefficient firms to avoid recognition of bad loans.
  • Productive firms, especially MSMEs and startups, face reduced access to credit.

Decline in Productivity

  • Zombie firms survive without innovation, technological upgradation, or efficiency improvements.
  • This lowers overall industrial productivity and competitiveness.

Distortion of Market Competition

  • Artificial survival of weak firms suppresses healthy market exit mechanisms.
  • Efficient firms face unfair competition through underpriced goods and excess capacity.

Rising Banking Sector Stress

  • Evergreening of loans increases Non-Performing Assets (NPAs) and weakens financial stability.
  • The twin balance sheet problem affects both banks and corporates.

Impact on Employment Quality

  • Such firms often generate low-productivity and insecure employment rather than sustainable industrial growth.

Hindrance to Structural Transformation

  • Capital and labour remain trapped in declining sectors instead of shifting toward sunrise industries such as electronics, semiconductors, and green manufacturing.

Causes Behind Persistence of Zombie Firms in India

Weak Bankruptcy Resolution

  • Delays in insolvency proceedings reduce timely exit of unviable firms.

Political and Regulatory Forbearance

  • State support to politically connected or strategically important firms delays restructuring.

Inefficient Credit Culture

  • Public sector banks historically engaged in loan evergreening to avoid balance-sheet stress.

Judicial Delays

  • Prolonged litigation reduces the effectiveness of insolvency mechanisms.

Institutional Reforms Needed

Strengthening Insolvency and Bankruptcy Code (IBC)

  • Ensure time-bound resolution processes.
  • Improve capacity of National Company Law Tribunal (NCLT).

Banking Sector Reforms

  • Enhance governance and accountability in public sector banks.
  • Strengthen early warning systems for stressed assets.

Efficient Capital Reallocation

  • Develop deeper corporate bond markets and alternative financing channels for productive firms.

Promoting Creative Destruction

  • Encourage competitive markets where inefficient firms exit and efficient firms expand.

Industrial and Technology Upgradation

  • Support modernization and productivity-linked incentives rather than blanket financial bailouts.

Data-Driven Regulatory Oversight

  • Use AI-based financial monitoring systems to identify persistent non-performing firms early.

Labour and Social Protection Measures

  • Provide reskilling and transition support for workers affected by industrial restructuring.

Value Addition

  • The concept of “creative destruction” was propounded by economist Joseph Schumpeter.
  • The Economic Survey 2022-23 emphasized efficient capital allocation and financial sector health for sustained growth.
  • The IBC, 2016 significantly improved India’s insolvency framework but faces implementation bottlenecks.

Conclusion

Zombie firms undermine productivity, innovation, and financial stability by trapping scarce resources in inefficient enterprises. For India’s manufacturing sector to become globally competitive and support the Viksit Bharat vision, institutional reforms must promote efficient bankruptcy resolution, transparent banking practices, and dynamic capital allocation. Sustainable industrial growth depends not merely on preserving firms, but on fostering productive and competitive enterprises.