Govt should ignore RBI, continue bank privatization drive

Privatization has never been easy in India, and will never be in the foreseeable future. The resistance mounted to the sale of public-sector banks (PSBs) underlines this fact. The latest one comes from the Reserve Bank of India (RBI).

The August 2022 issue of RBI Bulletin published an article, 'Privatisation of Public Sector Banks: An Alternate Perspective,' which basically argued for moderation, if not slowdown, in the privatization drive. The authors of the article were Snehal S Herwadkar, Sonali Goel, and Rishuka Bansal of the Banking Research Division, Department of Economic & Policy Research, Reserve Bank of India.

The footnote said, "The views expressed in this article are those of the authors and do not represent that of the Reserve Bank of India." It was a clever ploy on the part of the central bank: it expressed its reservations about the speeding up of bank privatization, as reported in the media, but also kept the option of wriggling out of the situation if it became tricky.

The situation did become tricky because the views expressed in the article were widely regarded as those of the RBI's. The RBI even had to issue a press release, distancing itself from the article. It reiterated that "the views expressed in the article are those of the authors and do not represent the views of the Reserve Bank of India."

Privatization is not a new concept, and its pros and cons are well known, the article in RBI Bulletin said in conclusion. "From the conventional perspective that privatization 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 RBI Bulletin article claimed to provide "an alternative view with evidence that public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike" private banks.

This was a tendentious, misleading article; obviously, the conclusions were erroneous. For, to begin with, there are only pros and no cons as far as privatization is concerned. As Prime Minister Narendra Modi rightly pointed out, the business of government is not business. The very idea of public sector is wrong; it militates against the spirit of a free economy. Secondly, in our country the conventional perspective is statist, not that of market economy.

Thirdly, the votaries of privatization don't say that it is a panacea for all ills; they only assert that selling PSBs and public sector undertakings (PSUs) will help the economy in a big way. Fourthly, those who favour "a more nuanced approach" are basically trying to check, if not stop, the efforts in the direction of privatization.

Fifthly, the RBI Bulletin article itself provides a big reason why PSBs should be privatized. It says that "PSBs are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals." This is not something PSBs and PSUs should be lauded for; this is a major problem, for it implies conflicting objectives of public sector entities. And no organization, run by government or private individuals, can ever succeed if it tries to achieve mutually conflicting goals.

Sixthly, when PSUs and PSBs incur losses because of the mixing of conflicting objectives and other reasons, the ultimate sufferer is the taxpayer. For the recapitalization of PSBs alone, the government or taxpayer has spent lakhs of crores of rupees in the last few years.

The RBI Bulletin article seems to be in reaction to a policy paper prepared by the Delhi-based think tank National Council of Applied Economic Research (NCAER). The NCAER reportedly proposed in July that "in principle" all PSBs, except the SBI, should be privatized. The fact that Arvind Panagariya, former Niti Aayog vice-chairman, was one of the two authors of this paper made its contents significant. Niti Aayog is a government think tank which is chaired by the Prime Minister.

Against this backdrop, the RBI Bulletin article should be seen as an endeavour of the deep pink state which comprises policy and decision makers wedded to the ideas of socialism and statism. This is not to suggest that the authors of the RBI Bulletin article are some kind of conspirators or are the tools of some devious plotters.

Decades of socialism has endowed Leviathan with some kind of artificial intelligence, gradually transforming it into a deep state. Unlike in a conventional sense, however, India's deep state is impersonal; it is not about a set of entrenched people but an institutionalized mindset which is innately anti-business, deeply statist, and mechanically anti-liberalization.

The Modi government must reject the misgivings expressed in the RBI Bulletin article and march ahead with the privatization of PSBs.