Thursday, November 5, 2009

Tim Harford on India’s Bank Nationalization and Airport Infrastructure

In an interview to ET Tim said:
Do you think India did the right thing by nationalising its banks?

According to the conventional wisdom, the mainstream economies were in recession and India was perhaps right in its strategy because it avoided recession, especially the Asian downturn. But, when it comes to openness for foreign capital, there is need to be more rational.

What do you observe when you look at India as an economy?

One of the first things that strikes me is that India is leaping forward in chunks. So, the airport infrastructure is fantastic, hotels are really good, but there is problem with traffic and other infrastructure. I see new and old worlds exist together in India, which is a good thing, but it’s going to put India under strain.

Here come two important piece of argument on Indian bank nationalization and airport infrastructure development.
Very convincingly Ila Patnaik
says what is true in bank nationalization.

"The larger employment generated by PSU banks is a cost to the economy. PSU banks have much lower productivity than private banks. The profit per branch of public sector banks is Rs 0.5 crore, a fifth of the Rs 2.5 crore for private banks. The profit per employee at Rs 2.6 lakh is only a third of the Rs 7.6 lakh for private banks. This is despite much higher wages at private banks. They lag behind on efficiency and profitability, thereby making financial intermediation costly for the economy. This reduces growth and productivity in the Indian economy.

However, as the Raghuram Rajan report argues, if efficiency and profitability are not the correct yardsticks by which to measure the success of public sector banks, and “social goals” such as financial inclusion and credit to the priority sector are the right objectives to look at, PSU banks have failed even on those. India continues to have a very poor performance on financial inclusion, even though a certain recipe of bank nationalisation, directed credit, etc, has been tried for many decades.

While in the ’70s and ’80s, opening branches to raise deposits may have been a priority, today the experience of many countries, including India, has demonstrated that access to credit is very important in the reduction of poverty as it helps smooth consumption. It is claimed that the right way to get this done is to force PSU banks to open rural branches. Empirical evidence shows that these approaches are not delivering results. In addition, these old approaches have failed to take into account India’s urbanisation and the increasingly important needs of financial services by the urban poor. The anti-competitive policies of the authorities, such as preventing branch opening or preventing the entry of new private banks, directly hurts the agenda of improving access to finance for the urban poor."

Bibek Debroy on airport infrastructure development

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