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Bank nationalisation: Blunder or masterstroke?

GS Paper 3

Syllabus: Effects of liberalisation on the economy (post-1991 changes)

 

Source: Indian Express

Context: 53rd anniversary of Prime Minister Indira Gandhi nationalising 14 banks. The government will bring legislative changes in the current session of Parliament to enable it to privatise PSBs (denationalization of Banks).

  • This article should be ready solely from Mains Perspective.

 

Nationalization is the process in which the government of a country or a state takes control of a specific company or industry. The post-1967 period saw a series of radical economic policies such as the nationalization of the 14 biggest commercial banks (1969), insurance (1972), coal industry (1973), an effort to nationalize wholesale wheat trade (1973), the takeover of ‘sick’ companies, etc.

  • According to many economists, the long-term impact of these decisions is being felt now, in terms of a looming banking crisis, inefficient coal sector, and poor insurance penetration (3.76% in 2019; one of the lowest in the world).

 

Aim of bank nationalization of 1969: Government aimed to take away the control from a few private players and expand the banking coverage to rural India so that sectors such as agriculture and small industries could get better credit facilities, thus creating a new class of entrepreneurs.

 

Nationalization of the 1970s was a bad move as it led to:

  • The emergence of structural features that bred inefficiency: The strategy of nationalization together with import-substitution-industrialization (ISI) and ‘Licence Quota Raj’ stifled entrepreneurship and innovation.
    • Nationalization led to lesser competition between the public sector and private sectors, this has again led to the bureaucratic attitude in the functioning of PSUs, Lack of initiatives and responsibility, populist pressures, irresponsible trade unionism, red-tapism, etc.
  • India lost out on ‘internationalization of production’:
    • India’s policy of nationalization and ‘protectionist’ inward-looking economy’ failed to take advantage of globalization that created East Asian miracle economies.
    • The implication of it was that India’s export shrank from 2.4% (1948) to 0.42 in 1980.
  • Erosion of fiscal prudence: Government expenditure kept rising due to the proliferation of subsidies and grants, salary increases with no relationship to efficiency or output, overstaffing, and other ‘populist measures.
    • Because of the lack of performance audit, finance from the public banks and PSUs failed to accomplish large public interest
  • Present Impact:
    • NPA crisis is considered the legacy of nationalization of banks of the 1970s and 80s: Government ownership and political interference reduced the accountability of banks and the twelve public-sector banks (PSBs) recorded gross NPAs worth Rs 5.47 lakh crore, more than twice the NPA of 19 private banks in 2020.
      • Also, nationalized banks are either operating under losses or experiencing falling dividends
    • The insurance sector is facing issues of low penetration (only 3.76% of overall insurance penetration in India), public sector monopoly, low non-life insurance (less than 1%), and poor financial health of public sector insurers.
    • The government has still not been able to close down all the nationalized ‘sick’ PSUs, thus draining taxpayer’s money.
  • Nayak Committee report (2014): Public sector banks have the poor financial position, selection process compromised and non-transparent, high NPAs, board governance weak.
  • Economic Survey review of bank nationalization (2020): Every rupee of taxpayer money invested in PSBs fetches a market value of just 71 paise ( in contrast private sector banks fetches a market value of Rs 3.70)
  • Issue of “phone banking”: Public sector bank officials can be forced to extend loans when such loans don’t make economic sense.
  • Economic survey 2020 pointed out that PSBs enjoy less strategic and operating freedom because of majority government ownership.

 

However, nationalization did help the Indian economy as it led to:

  • Higher penetration of banking in rural areas and underdeveloped sectors: from just 8,262 bank branches (1969) the number rose to 30,303 in 1979.
    • Liberal credit availability by banks led to India’s growth process, particularly during the Green revolution.
    • Credit to rural areas increased from Rs 115 crore to Rs 3,000 crore, a twenty-fold increase.
    • Both rural bank deposit mobilization and rural credit increased significantly after the 1969 nationalization
  • Priority-sector lending:e. setting aside 40% of banks’ net bank credit for agriculture, micro and small enterprises, education, housing, and “weaker” sections.
  • Domestic saving: The rates of domestic savings and investment increased rapidly from 10% in the 1950s to 20% by the 1980s.
  • Removed monopoly of the private sector in some sectors such as coal: After the nationalization of the coal industry in India, India never witnessed a demand-supply gap until 1991
  • Investment in Government Securities: There has been a significant increase in the investment of the banks in government and other approved securities in recent years.
  • The Balance of payment situation improved considerably after nationalization as the green revolution led to a reduction in food and other imports. By 1978-79, foreign exchange reserve had risen to about a peak of $7.3bn.
  • Soared employment opportunities: The huge expansion of PSUs created job opportunities, giving employment to a vast number of educated youths in the country.
  • Success of “JAM Trinity”: JAM stands for Jan-Dhan, Aadhaar and Mobile number.
    • The initiative would have been a non-starter had there been only private banks and no PSBs in the country.
    • Of the total 46 crore beneficiaries, only 1.3 crores have accounts in private sector banks — that is just 2.82%.

 

Thus, conceptually nationalization was a good idea as it pushed for redistribution of wealth, job creation, and financial inclusion. However, efforts should have been taken to improve efficiency and make PSUs competitive as was done by China.

 

Insta Links

Nationalization of Banks

 

Practice Questions

Q. What were the factors that led to the nationalisation of banks? Examine its impact on economic development and job creation. (15M)

 

Consider the following statements: (UPSC 2019)

1.Coal sector was nationalized by the Government of India under Indira Gandhi.

2.Now, coal blocks are allocated on lottery basis

3.Till recently, India imported coal to meet the shortages of domestic supply, but now India is self-sufficient in coal production.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 and 3 only

(c) 3 only

(d) 1, 2 and 3

Answer:A

Both statement 2 and 3 are incorrect. Coal is allotted in auction and India still imports coals (especially coking coal)

 

The basic aim of Lead Bank Scheme is that ( UPSC 2012)

(a) big banks should try to open offices in each district

(b) there should be stiff competition among the various nationalized banks

(c) individual banks should adopt particular districts for intensive development

(d) all the banks should make intensive efforts to mobilize deposits

Answer: C

The Lead Bank Scheme, introduced in year 1969, envisages assignment of lead roles to individual banks for the districts allotted to them.

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