Should the government be in the banking business?

The Government of India has been engaged in running a lot of businesses and commercial enterprises that it should not have got into in the first place. But the government’s entrepreneurial role is the legacy of the Nehruvian era, which was driven by the socialist ideology. But having witnessed the collapse of the communist regimes across the world after the fall of the communist rule in the erstwhile Union of Soviet Socialist Republic (USSR) in 1991, India, under the leadership of Narasimha Rao, set out on a course correction by opening up the economy through liberalisation and economic reforms. The process of economic reforms is not finished yet.

The reason for going back into history is the International Monetary Fund’s Financial Sector Stability Assessment (FSSA) report which has recommended that the Indian government should privatise certain public sector banks (PSBs) or sell its stake in some of the PSBs so as to bring it down to 51% and adopt a hands-off approach so far as the management of the PSBs is concerned.

The Indian government is well-disposed to the idea of stake sale in PSBs as it helps the government to raise money without having to raise taxes or impose new levies on the general public. But it would be unwilling to let go of its management control on the PSBs as these provide financial muscle to the government. This brings us back into the ideological issue of the role that a government is supposed to play in the life of a nation. Should a government be a commercial banker engaged in the business of borrowing and lending to the general public? This question is as relevant as asking whether the government should be in the business of making and selling breads, to which the answer would be an emphatic NO. So, it was good that the government divested its stake fully from the bread-maker Modern Bakeries (India) Ltd.

The question now is: Should the government continue to do business in various other sectors of the economy, including commercial banking? The nationalisation of private banks by Indira Gandhi in July 1969 was driven by ideological considerations and political expediency, but those ideological considerations now no longer prevail. Hence, there is no reason for the government to continue with the socialist legacy. After all, if the government could divest its stake completely in Videsh Sanchar Nigam Limited, it can do so in many other commercial enterprises, including the PSBs.