Aggressive privatisation: What’s the view?

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Privatization is not a panacea for all ills, and it has its pros and cons – a view alien to our times, and yet it would make some waves if some economists from the country’s central bank pantheon said so.

Given the calls for aggressive privatization – a policy to which the current government is deeply committed – the advice to slowly move ahead with the privatization of the PSU banks is surprising, if not more so. The alternative privatization perspective of the RBI economists is not unfounded. These economists from the Banking Research Division, Department of Economic and Policy Research and Reserve Bank of India (RBI) have argued in an article that the PSU banks in the country are not solely driven by profit maximization (as were private sector banks ). Viewed through the social and broader economic impact filters, public sector banks (PSBs) have outperformed private sector banks.

PSBs are at the forefront of financial inclusion – 78% of the PM’s Jan Dhan accounts are with PSBs. They have been more effective in disbursing loans to priority sectors (although private banks have been more reluctant to make such loans) and the infrastructure sector. The article also explains that while private bank lending tends to be pro-cyclical, counter-cyclical lending by state banks helps smooth the business cycle. In times like these, when entrepreneurs are hailed as demigods and privatizations are viewed as reforms of the highest order, the article is sure to generate quite a bit of attention. The RBI was quick to clarify that the views of the article were those of the economists, not the bank.

While the public sector has been labeled a value destroyer, the private sector has also seen many value destroyers over the years – just look at the number of companies that have recently gone into liquidation or the list of the top 25 wanton companies by default. While we criticize the public sector, we sometimes overlook its impact on stabilizing a shaky post-independence economy, even today. Let the entrepreneurial zeal of the private sector thrive, but perhaps PSUs still play an important role when person-centred intervention is needed.

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