Five, improve the bankruptcy code. In a downturn, some firms could die. While these are unpleasant events, interfering with the processes of firm death may not only be beyond the capacity of the government, it would not be desirable. The focus of the government should be on dealing with the consequences of firms going under rather than on trying to sustain them. We have seen in the past that sick mills that were taken over by the government in periods of distress never recovered and remained liabilities for decades. The bankruptcy code recommended by the Rajan committee should be put in place. Banks and creditors should be able to recover dues rapidly and not be stuck in court for endless years.

Six, monitor banks continuously. One clear area that requires focus is the transmission of firm failure into bank fragility. A special push is required on monitoring weak banks and rapidly addressing them. Banking supervisors can miss out crucial weaknesses in banks when the supervision takes place at long intervals. In a rapidly changing environment, supervisors needs to work overtime.

Six, ensure the National Rural Employment Guarantee Scheme works efficiently. When layoffs take place, labour market conditions will become soft. Even though NREGS is limited to rural India, and setting up an urban NREGS in a hurry may not be feasible; since a large section of workers are migrants and continue to have rural links, the NREGS is now particularly important. It can both help individuals who are experiencing bad times and generate counter-cyclical expenditures. At the same time, new work should be initiated on improving the efficiency of implementation of the NREGS. The government should make sure that there is a timely release of adequate funds for the programme.

... contd.