A warning on loose talk about bank privatisation

The free market enthusiasts in the Modi government and in the public sphere are afraid to discuss openly the pros and cons of a market economy: whether a market economy can function with its own rules or whether government regulation is needed and whether there is something called market failure. These issues might appear to be fruitless theoretical babble, but they need to be clarified time and again, and there are no simple answers either way.

Cautious: The RBI is walking the tightrope of not identifying itself with a recent research paper that challenges the government stance on privatisation of banks. PTI

Parsa Venkateshwar Rao Jr

Senior Journalist

It is interesting that in the recent clarification issued by the Reserve Bank of India (RBI), the RBI has said that the research paper titled ‘Privatisation of Public Sector Banks: An Alternate Perspective’, published on August 18, does not express its views. But the clarification goes on to quote some key conclusions of the paper, indicating the thrust of the argument made by its authors — Snehal S Herwadkar, Sonali Goel and Rishuka Bansal, who belong to the Banking Research Division, Department of Economic and Policy Research of the RBI.

The first quote of the three from the paper that the RBI cites is: “From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it.” The second quotation: “Recent mega merger of PSBs has resulted in the consolidation of the sector, creating stronger and more robust and competitive banks.” And the third and final quote from the research paper included in the clarification statement is: “A big bag approach of the privatisation of these banks may do more harm than good. The government has already announced its intention to privatise two banks. Such a gradual approach would ensure that large-scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission.”

The RBI is walking the tightrope of not identifying itself with the research paper, of trying to say that the privatisation project of the government is on course, and it is providing a justification for the government’s apparently cautious approach.

Most economic pundits in this country, including commentators in the media, position themselves as high priests of a market economy without an understanding of the complexities of a market economy and its inevitable cyclical nature. India’s market enthusiasts have been naïve admirers of the American economy, and they did not spare enough time to study the basis of the welfare state and the state support for the market mechanisms in European countries. It was easy for Indian experts to display utter contempt for the bureaucratic mess of the European Union, not recognising that the Human Development Index (HDI) in Europe is connected to the welfare structure.

Indian economic experts — and we must leave out the unrepentant and unreformed leftists who continue to speak in antiquated socialist phrases which even the poor in India do not believe — have so far not taken note of the Global Financial Crisis (GFC) that rocked the western market economies in 2008-09. That is why the RBI research paper on the privatisation of the public sector banks (PSBs) should serve as a wake-up call for India’s economic commentators.

There is a curious division in the Modi government. Prime Minister Narendra Modi has been trying to use the state structures built in the pre-1991 reform era like the PSBs, the Public Distribution System (PDS) and the last socialist legislation of the second term of the Manmohan Singh government pushed by Sonia Gandhi in the form of the National Food Security Act (NFSA) in the face of opposition and scepticism from stalwarts like Sharad Pawar. Modi has been able to push his Pradhan Mantri Jan Dhan Yojana (PMJDY) through the PSBs and his free ration for 800 million people from the latter half of 2020 to the end of September 2022 through the provisions of the NFSA. The research paper says, “As of July 2022, more than 45 crore beneficiaries have been banked and 78 per cent of these accounts were in PSBs.”

But Finance Minister Nirmala Sitharaman is a vocal advocate of the free market and she takes pride in the fact that the government had got rid of Air India and flaunts it as a trophy of the government’s privatisation programme. Of course, the Modi government has been less than successful in its ambitious disinvestment programme. It is not that Modi and Sitharaman are pursuing different agendas. It is just that they find it necessary to hasten slowly the process of privatisation. While the Prime Minister talks loudly about the “free ration” that has been provided to the people, neither he nor his supporters seem to know that this could not have been done without the elaborate PDS structures built from the bad old socialist era.

The research paper challenges the government’s view about privatisation of PSBs as underlined in Sitharaman’s Union Budget speech of 2021-22. It notes: “Privatisation has had its significant influence over economic thinking in India as well, although banking had remained largely untouched by its winds recently. In the Union Budget 2021-22, the government announced its intent to take up the privatisation of two PSBs.” And it quoted from the paper authored by P Gupta and A Panagariya in saying, “PSBs have underserved the economy and their stakeholders”, and they go on to provide evidence to the contrary in the rest of the paper through quantitative evidence.

The free market enthusiasts in the Modi government and in the public sphere are afraid to discuss openly the pros and cons of a market economy: whether a market economy can function with its own rules or whether government regulation is needed and whether there is something called market failure. These issues might appear to be fruitless theoretical babble, but they need to be clarified time and again, and there are no simple answers, either way, to make the necessary course corrections. Governments are afraid of course corrections because they think it amounts to an admission of failure, and free market experts are so blinkered that they think there is no thing such as course correction.

A strong believer in a free market economy understands the need for a free debate on the merits and demerits of the system. Modi’s ambivalence towards a free market system is understandable. He knows that more than the GDP growth rate, what counts with people, especially at the time of election, is the benefits that the government has been able to dole out to the people. And Sitharaman can continue to sing the praises of a free market economy.