Behind the smokescreen of nationalisation

At the height of the great financial crisis in January 2009, an ensemble of edgy business captains at the World Economic Forum in Davos told Christine Lagarde that one of the persisting problems since ages was that the political class had little understanding of business. Lagarde, then French finance minister, told them that it was the other way round: “You do not understand politics!”

The nationalisation of banks completed the 53rd year on July 19. The success, or otherwise, of the deft move would also be a mirror of the ascent of the Indian economy in terms of rapid financial inclusion of the unbanked led by public sector banks beginning with the Pradhan Mantri Jan Dhan Yojana in 2014. In essence, the flow of money is now broad-based, with social capital supposedly getting aligned in the mainstream, resus­citating the grassroots and green shoots of democracy through massive efforts in finan­cial inclusion. It is thus an apt time to revisit the chequered times of yore to look at the compelling reasons behind bank nationalisation, keeping aside the hullabaloo. After all, to understand the future, one must read the history well.

Behind the veneer of “public purpose” as the overarching philosophy propelling the hurried verdict of nationalisation of 14 leading banks in July 1969 lies the story of an economy ravaged by two successive wars and massive concerns on food security. The common man, disillusioned from the waning tryst with destiny, was looking increasingly restive.

Illustration: Ajay Mohanty

Against this background, then Prime Minister Indira Gandhi had taken over the mantle after the sudden vacuum created by the demise of Lal Bahadur Shastri, with Morarji Desai as the Deputy PM and finance minister. With the economy somehow in a tailspin, there was a strong undercurrent from “left leaning democratic socialism” in the power circles. This was justified as the Congress government, with a wafer-thin majority and having lost 78 seats from 1962, had to seek frequent support from left-leaning parties on important issues. Simultaneously, the mercurial rise of the Swatantra Party that was making rapid inroads into the hinterland also created serious troubles. Swatantra Party, founded by C Rajagopalachari and having stalwarts like N G Ranga, Minoo Masani, K M Munshi as also Gayatri Devi from the Jaipur palace, was advocating market-based economy and had emerged as the second largest political outfit in the 1967 elections, winning 44 seats. The gathering storms on the horizon demanded a swift and dramatic rebuttal, essentially for survival of the ruling dispensation.

As the tug of war for power gained currency in the Congress, a brahmastra was finally delivered by the then prime minister after the deputy prime minister had resigned prior to July 19, 1969. At 8.30 pm on July 19, in her address to the nation, the grandiose plan of bank nationalisation was unveiled, and it was intended for championing the cause of a just social order for the masses, in particular at the bottom of the pyramid.

Interestingly, Garibi Hatao met its force de jure in the bank nationalisation. It was the “Mo Cuishle” anthem masses chanted for another decade as PM Indira Gandhi swept the syndicate a few months later in the November 1969 Congress bifurcation. It was the death blow for the Swatantra Party that shrank irrevocably. Abolition of privy purses and sharp hike in income tax were the last nails in the coffin as India truly embraced a socialist economy in all its grandeur.

By now, it is evident that bank nationalisation was anything but an economic decision. However, if one were to ask for the most compelling economic reason for the bank nationalisation, it would be the failure of many banks since WWII (around 350), aggravating post-independence and subsequent M&As that saw only 94 private banks remaining in the ecosystem. Interestingly, the SBI had already been entrusted with 8 banks from the erstwhile princely states, though these banks were not fully merged. It was doing the job assigned well; that of proliferating banking in the unbanked areas of the vast country, deepening economic liaisons with the masses and classes alike.

A day later, on July 20 when Neil Armstrong took one giant leap for mankind, history in India had already altered its course for good. The RBI memoir calls it the defining economic event, the single most important socioeconomic decision taken in post-Independence India.

Bank nationalisation was annulled by the Supreme Court (10-1) echoing many voices of dissent on economic grounds. Moraji Desai was of the view that instead of nationalisation, the object of adequate flow to an effective social sector could have been achieved by amending the banking laws.

Other points of opposition included that nationalisation will not improve the efficiency of banks. It was contended that nationalisation will penalise bank efficiency and good management because under Section 35AE of the Banking Regula­tion Act (BRA) 1949, a banking comp­any could be acquired only if they were badly managed. None of the 14 banks that were nationalised in 1969 were under any direction from the RBI under this Section of the BRA.

Even as now there has been a clarion call for privatisation of PSBs, the current government has instead rightfully implemented a public sector banks reforms agenda vide Enhanced Access and Service Excellence (EASE) on predefined objectives and benchmarked metrics. The index measures performance of each PSB on 140 objective metrics across 6 themes and provides all PSBs a comparative evaluation showing where banks stand vis-à-vis benchmarks and peers on the reforms agenda. Recently, on June 8, EASE 5.0 has been launched. It will focus on digital customer experience and integrated and inclusive banking, with emphasis on supporting small businesses and agriculture. It is clear that the current government architecture laid out in the last years bears an uncanny resemblance to the concerns raised in the Nayak committee recommendations of 2014 on governance/regulations of PSBs.

Today, the prodigal sons of the soil need holistic and exact level playing field with private sector banks and unstinted support to continue their dual mandate; serving the masses with right and safe products, services and attitude while keeping the financial frontiers of the nation fortified in an increasingly uncertain world. Making the rules and regulations uniform across the banking aisle could be the best bet of privatisation for our PSBs.

(The authors sincerely acknowledge the first-hand account detail by Shri D N Ghosh, former bureaucrat and chairman, SBI, in his memoir No Regrets)
 

The authors are group chief economic advisor and AGM, State Bank of India. Views are personal