Thinkpad: Old Ideas. ___ Outcomes.
This week’s Thinkpad is a sort of fill-in-the-blank. There were a lot of ideas thrown our way this week. The ideas we got were not entirely new. The outcomes will be _______.
Before you rush to fill in the blank, we’ll share some thoughts with you on the ideas we are referring to. Most of them came through in the budget. One in the RBI policy that followed. Yes, it was a busy week.
The first of them is bank privatisation. The government said it will privatise two state-run banks this year, as a start to a wider privatisation programme. We have no information on which banks they intend to pick and how, although we suggested an approach in this piece. This is, of course, the Nth time the idea of privatisation has been discussed. A committee headed by former RBI Governor M Narasimham in 1998 suggested it and many others since have done the same in one form or the other.
Progress always gets stalled by three factors — unions, lack of appropriate buyers, and the government’s willingness to let go. What’s changed this time? Has the power of bank unions in a digitally savvy financial sector may have reduced? Maybe to some extent. Are there more buyers now interested in buying PSU banks? To the contrary, with licences on tap, demand for an outright purchase may have actually reduced. Unless we intend to permit corporate houses to run banks. As for the government’s willingness to let go, let’s just say their actions don’t match their intentions.
The second idea is that of setting up a development finance institution. This is also old wine in a new bottle.
In many ways, a DFI is being attempted again because there is no other option. There seems to be a plan to give this institution a government guarantee which permits it to raise long term funds overseas. But that’s hardly going to cut it. As bankers who worked at erstwhile DFIs pointed out in this piece, there are other factors such as the RBI’s bad loan norms and the absence of a central bank long term lending facility, which will make a new DFI a challenge.
The third idea came from the RBI — to give retail investors more direct access to buying and selling of government bonds.
This has already been attempted via two existing indirect facilities but neither has worked. This time the RBI will allow retail investors to open accounts directly with the central bank. Will that lead to a more retail debt market in India? Many claim that debt is difficult to understand and retail investors won’t get it. That’s hogwash. The only reason this may not work is if the process and tech interface is clunky or cumbersome. In that case, all bets are off because participation and liquidity will be low and the idea will die another death.
So, we return to the question we started with. And we’ll make it a multiple-choice answer:
- Old ideas, new outcomes.
- Old ideas, somewhat new outcomes.
- Don’t waste my Sunday.
If you picked the last option, we won’t hold it against you. Have a good weekend.