Repeal Bank Nationalisation Act, trim govt ownership to 25% in PSU banks: Ex RBI advisor

People queue to deposit or exchange their old high denomination banknotes outside State Bank of India on the outskirts of Agartala, India, November 16, 2016. REUTERS/Jayanta Dey - D1BEUNDRSUAA

"The current crisis is too good a crisis to waste… To modernize the banking system and improve its overall efficiency, India clearly needs large private sector banks to compete with large public sector banks. An essential first step would be to repeal the Bank Nationalization Act and bring PSBs under the Companies Act," said Professor Vijay Joshi, Emeritus Fellow, Merton College, Oxford.

"This would give the government the flexibility to reduce ownership to any extent it chooses. To privatize, i.e. to cede control, it would, in practice, have to reduce its stake to 25 percent or even lower, though it could, for a short transitional period, retain a so-called ‘golden share’. Needless to say, as experience shows, private banks can also become reckless and delinquent, so both public and private banks will need to be firmly regulated. In doing so, India would simply be following international best practice," Joshi said while delivering the 15th LK Jha Memorial Lecture titled 'India’s Economic Reforms: Reflections on the Unfinished Agenda'.

Joshi, who was special advisor to the RBI 34 years ago, pointed out how successive Indian governments have been stuck with the idea of 51 percent ownership and have only flirted with the idea of privatization.

"Unlike privatization, disinvestment does not bring the full advantages of a change in managerial incentives and autonomy. The sale price is also bound to be adversely affected when the government does not relinquish control, which means that the minority sales have been made at unfavourable prices. It is high time the government grasped the nettle of mounting a significant programme of privatization, at least of those PSEs that make losses or meagre profits and in turn bring higher productivity and also fiscal gain," Joshi said, according to a speech uploaded on the RBI website.

Even as Joshi, appreciated the insolvency and bankruptcy code, clean-up exercises and recapitalisation announcements, he pointed out that the basic problem of poor governance at PSBs will remain after recapitalisation, with a high chance of a return to square one in the future.

The government has announced a recapitalisation package worth Rs 2.11 lakh crore for the capital constrained, NPA-heavy public sector banks (PSBs) struggling to stay afloat.

There is clear evidence that the performance of India’s PSBs is sub-standard, he said. The situation has got worse since the global credit crisis; stressed advances of PSBs now stand at around 16 percent of total advances, compared with about 4.5 percent in private banks.

Five key areas of inclusive growth

Joshi discussed the five areas in which radical reforms would boost rapid and inclusive growth - state ownership, employment creation, deep fiscal adjustment, quality of education, and state capacity.

Citing some relevant data, Joshi said, "One-third of the 244 non-financial Central PSEs made losses in 2015-16; and of the 78 loss-makers, more than a half made losses for three years in row. There are also several perennial loss-makers, including Air India and two public telecom companies; and some profitable companies such as Coal India owe their performance not to efficiency but to their monopoly positions. The profitability of Central PSEs, as a whole, has been declining steadily for the past 10 years. In addition to Central PSEs, there are around 1000-odd State PSEs, of which two-thirds make losses, including notably the zombie electricity distribution companies. The aggregate losses of all PSEs, central and state, amount to about one per cent of GDP annually."

Speaking of employment challenge and shortage of ‘good jobs’, he said wage subsidies could play a helpful role.

Although addressing constraints pertaining to infrastructure, credit, land-acquisition and skill is important apart from facilitating ease of doing business, Joshi said labour market reform and exchange rate management were also very important.

The government and the RBI “should lean less towards liberalization of debt inflows and inflows of hot money, and more towards maintaining a stable and competitive real exchange rate than has been the case in recent years,” he said.

Calling GST an extremely positive step, Joshi said rationalization of the numerous tax rates and exemptions in the GST is urgently needed.

According to him, a radical programme of ‘deep fiscal adjustment’ would require close coordination between the union and state governments to "not merely compensate the poor for the removal of subsidies but to: i) finance a basic income supplement for half of the population, or the whole of it (so as to avoid the problem of identifying the poor); ii) make large increases in public investment and desirable social expenditures such as education and health care; and iii) make a contribution to reducing the fiscal deficit.

Combined with an improvement in resource allocation from the removal of price controls, the scheme as a whole would thus be a ‘triple win-win’ for inclusive growth,” he said.

Further, he mentioned that unless India improves the quality of primary education by either a voucher-style competitive system or by undertaking a massive systemic reform within the existing framework, economic development is likely to be arrested.

And lastly, he said state capacity including judiciary, policy and administrative reforms and human resource management is important.

Can India do a China or South Korea?

India still has around a quarter of its billion-plus population surviving in extreme poverty, and two-thirds of its people are poor enough to have but circumscribed opportunities to lead a fulfilling life. To become a prosperous, high-income country in the next two decades, India will have to achieve ‘super-fast growth’, at a growth rate of 8 percent a year or more, Joshi said.

The magnitude of the task can be understood by contemplating the sobering fact that fewer than half a dozen out of the 200-odd countries in the world have achieved super-fast growth for two decades on the trot, and most of them were autocracies during their rapid sprints. Can a democratic India do a China or a South Korea?

For this, Joshi said, India must competently perform its core functions including the provision of macroeconomic stability, smart regulation, correction of market failures, efficient income redistribution, and effective supply of public services.