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Govt should try real banking cure: Privatization

The Narendra Modi government’s decision to augment the size of Budget 2020-21 doesn’t augur well for public finance and the economy. The augmentation will worsen the deficits, enlarge the size and scope of state intervention, and have far-reaching ramifications for the economy at large.

Finance Minister Nirmala Sitharaman has sought parliamentary nod for an additional spending of Rs 235,852.87 crore during the current fiscal. Some expenditure in this time of the unprecedented crisis is inevitable. For instance, an extra allocation of Rs 40,000 crore is sought under the Mahatma Gandhi National Rural Employment Guarantee Scheme or MGNREGS.

However, seeking Parliament’s approval for Rs 20,000 crore to recapitalize public sector banks (PSBs) to facilitate further lending is regressive. As we wrote earlier (https://indianarrative.com/economy/govt-begins-bank-privatization-but-its-a-herculean-endeavor-6211.html), “For privatization is the only way to cure banking. In August 2015, the then finance minister Arun Jaitley had launched a seven-pronged plan, Indradhanush. The seven components pertained to appointments, a Banks Board of Bureau, capitalization, de-stressing, empowerment, framework of accountability, and governance reforms.”

To little avail.

Nothing other than privatization can revive PSBs for the simple reason that they are owned by the state. The theory is romance: the nation controls banks. The reality is not so romantic, though, for in practice the nation invariably boils down politicians and bureaucrats, certainly not the most honest and efficient people in the country.

It is a well-known fact that non-business considerations are often taken into account. The consequences are cronyism, venality, unaccountability, ‘loan melas’, evergreening, swelling bad debts, and so on. This has happened in the past; bank after government-run bank embellished its books, treated willful defaulters with kid gloves, allowed loans to be evergreened, and often unquestioningly followed politicians’ orders. Hence the Nirav Modis and the Mehul Choksis.

This is the reason that experts, many of them within the system, have pointed out that privatization is the only solution. In the wake of the Nirav Modi scandal, former chief economic advisor Arvind Subramanian had suggested increasing privatization in the banking sector. Former RBI deputy governor Viral Acharya also expressed a similar opinion at that time.

Just before Modi’s ascension in May 2014, an RBI committee under former Axis Bank chairman P.J. Nayak, had had come to the same conclusion. “If the government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures, all these external constraints would disappear,” the report said. “This would be a beneficial trade-off for the government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully.” An RBI committee under M. Narasimhan in 1998 had also recommended bank privatization.

It is unfortunate that the decision makers in the government continue to ignore expert opinion and persist with public sector banking. The recent measures announced may provide a treatment for banking problems, but there is a critical difference between treatment and cure, and the real cure is privatization..