March , 2021
Inconsiderate privatisation to cause abysmal trouncing
13:59 pm

Rajiv Khosla


Even before India’s independence, leading industrialists of that era (JRD Tata, GD Birla, Lala Shri Ram, and John Mathai, etc.) declared in the ‘Bombay Plan’ of 1944 that post independence, only government investment would be encouraged to boost economic growth as well as for undertaking the projects - whose gestation period is long. They attributed the lack of resources as its prime reason. For protecting the Indian industries, it was recommended that heavy taxation be imposed on the imported goods. 

After independence, the Indian policymakers adopted a model of mixed economy wherein both the private as well as public sectors co-exist, but public sector was handed over the baton for all-round development. The then government also decided to nationalise various sectors (from time to time) to keep goods and services cheaper, put a curb on social inequalities, increase the efficiency, adequate financing for the development projects and to serve the public at large.

Wave of nationalisation

At first, on 28 May 1953, under the Air Corporations Act, the Indian Parliament nationalised nine airlines and converted them into two airlines only - Indian Airlines and Air India International. On June 19, 1956, then government enacted the Life Insurance Corporation (LIC) Act, under which 154 Indian insurers, 16 non-Indian insurers and 75 provident societies were nationalised and subsequently brought under the LIC that was established on September 1, 1956. Subsequently, the government led by Indira Gandhi on July 19, 1969 nationalised 14 banks having 85% of the total time deposits at that time. Again in 1980, six more banks were nationalised.

Coal mines were nationalised under four different acts enacted by the parliament from 1971 to 1975 under which 937 mines, 226 coking coal mines and 711 non-coking coal mines were taken over by the government. On September 20, 1972, Parliament nationalised 107 insurance companies and brought them under four different insurance companies viz. National Insurance Company Limited, Oriental Insurance Company Limited, New India Insurance Company Limited and United India Insurance Company Limited.

Endurance to the nationalisation wave continued till 1980s and almost all the governments pursued the policy of keeping public sector in dominant position and economic self-reliance.

Augmented disinvestment and privatisation 

Subsequent governments after 1991 initiated divestment/disinvestment of public sector units under the guise of either promoting competition or combating fiscal deficit. The Congress or United Front governments in the time period ranging from 1991 to 1998, amid heavy trade union pressure could manage to undertake limited di(sin)vestment of central public sector enterprises. It was the Atal Bihari Vajpayee led NDA government during its first term in 1999 that took major steps towards disinvestment. Specifically, the government disinvested Bharat Aluminum Company (BALCO), Hindustan Zinc, VSNL and Indian Petrochemical Corporation Limited.

Statistics also show that the pace of disinvestment remained accelerated under the BJP governments rather than non-BJP governments. Total disinvestment in India since 1991 has been to the extent of `507346.84 crore of which `381950.69 crores (75%) has been realised under the BJP governments. When we talk of PM Modi’s reign, i.e. since 2014 till now, the government has realised `348294.96 crore from disinvestment proceeds - that stands as a record.

Now the proponents of patriotism who once said ‘sougandh mujhe is mitti ki mein desh nahin mitne doonga, mein desh nahin rukne doonga, meing desh nahin jhukne doonga’ seems determined to privatise all the non-strategic units and argue that private sector only can bring in investment, best global practices, top-quality managers, changes in management and modernisation.   

Inimitable model of bank privatisation

Amid widespread privatisation, the process adopted for privatisation of banks stands not only unique, but fatal too, that requires an in-depth understanding to figure out its consequences. Instead of privatising the banks in a single swoop, the government is pushing the banks closer to privatisation day by day by creating such conditions that render privatisation as the only option.

Initially, the Internal Working Group (IWG) set up by the Reserve Bank of India, in November 2020 recommended that large corporate houses be allowed to promote private banks after necessary amendments in the Banking Regulations Act. It also emphasised that the non-banking financial companies like Tata Capital, Aditya Birla Capital, Muthoot Finance, etc. with assets of `50,000 crore or more should be permitted to obtain banking license.

Since public sector banks are struggling with the non-performing assets badly, central government proposed the setting up of a ‘Bad Bank’ in this budget to keep the accounts of the banks clean. Reserve Bank of India (RBI) in its latest Financial Stability Report pointed out that the total NPAs of banks in India may increase from 7.5% in September 2020 to 14.8% by September 2021. Further, the NPAs of public sector banks may increase from 9.7% to 16.2% during the same time period.

A Bad Bank is expected to work on the lines of Asset Reconstruction Companies (ARCs). Typically, an ARC acquires the bad debts/NPA accounts from Banks and Financial Institutions and tries to recover the dues from the borrower by availing remedies available under the existing laws of India. A bank or financial institution is given 15% value of the asset in cash and rest they receive in bonds/debentures in exchange for the NPAs transferred to the ARC. Bonds or debentures have a maximum maturity of six years and rate of interest is generally 1.5% above the RBI’s bank rate. The same model will get replicated in case of Bad Bank too, wherein the government will not provide any direct amount to the bad bank, except a sovereign guarantee to meet the regulatory requirements.

The tremendous commitment being shown by the government may be attributed toward the cleaning of public sector banks accounts so that the buyers of these banks may not have to face any difficulty tomorrow. 

Another step in this league is associated with the permission granted to private banks to conduct government-linked banking business. Continued prohibition to the private sector banks to conduct government-linked business means an embargo to the public sector bank to conduct government linked transactions as it is now sold in the hands of private parties. Since this proposition sounds ridiculous as the bank was undertaking all such transactions when it was in the public sector, hence the government granted permission to private banks to conduct government business.

In context of social sector schemes (MGNREGS, PM- KISAN, old age pensions etc.) allocations are hitherto disbursed through public or co-operative banks but by lifting the embargo on private sector banks, the government seems determined to spread out the branches of private banks in rural areas. Further, all Ministries or Departments of the government are associated with at least one public sector bank for transacting salaries, pensions and tax deductions. It also stands as the spinal cord of public sector banks. The government is hard bent to break this backbone and weaken the public sector banks. 

               The privatisation of public sector banks gives rise to a number of questions, the answers to which should be categorically supplied to the general public. After privatisation of public sector banks, do the account holders will have to keep the same average monthly amount as private sector banks have mandated? Will the services of banks become as expensive as the services of typical private banks? Will private banks accord any priority to lending to a particular sector?

These are some of the bitter questions that the government looks reluctant to answer. When we are unable to tame the costly services of private banks even when the Banking Regulation Act stands strong today, it is not difficult to predict what will happen in future with the weakening of Banking Regulation Act. Though, this privatisation of public sector enterprises may temporarily help the government to tide over the financial predicament, yet the government abdicating all its responsibilities will do great harm to the general public, which will never be remedied.



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