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Privatising India’s Public sector Banks

July 25, 2022

Privatising India’s Public sector Banks
In 1969, India’s government nationalised the country’s banking industry. The goal was to make financial services more inclusive, and to spur economic development by directing the financial sector. This was in keeping with the post-independence strategy of occupying the “commanding heights” of the economy, but that approach was already showing signs of dysfunction by that time.

The subsequent record has been mixed, at best, and economic reform has included gradually making room for private sector banks, while trying to strengthen public sector banks through structural reforms.

In an analysis that has already received considerable attention, prominent economists Poonam Gupta and Arvind Panagariya (GP) make a careful and convincing case for a big push to privatize India’s public sector banks. Currently, there are 12 of these, but the State Bank of India (SBI) stands out in terms of its size, importance and operational quality. So, GP suggest that SBI remain in the public sector, but argue forcefully that the remaining 11 banks be privatised completely.

The case for privatisation is based on the relative record of public sector and private sector banks over recent decades. While there has been considerable variation in the quality of performance within each category, on average, private sector banks perform much better than their public sector counterparts.

Greater efficiency through privatisation can improve the allocation of financial resources within the economy, promote growth in the financial sector, and support higher overall growth of the economy.

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