Look at Air India. Within two decades of competition appearing on its turf, it has been reduced to the fourth largest of five airlines in the domestic market. Mahanagar Telephone Nigam and Bharat Sanchar Nigam, once the monopoly providers of phone services, survive on massive government largesse, while their larger and profitable private sector competitors plan new investment in billions of dollars. It has been the same story in housing (compare the Delhi Development Authority's record even after enjoying a virtual land monopoly in the capital with DLF's in neighbouring Haryana), and a variety of industrial sectors: cement, two-wheelers (remember Scooters India?), engineering... State-owned metal producers expanded rapidly only after they were privatised, and privatised hotels have been transformed in virtually every city. There are exceptions, like the Steel Authority of India, which has continued to do well and expand, but private steel production now is more than half the Indian total. The short point is that the public sector invariably finds it difficult to hold its own in a competitive market.
In sharp contrast, the public sector remains dominant in banking and insurance; the great majority continues to trust government-owned banks much more when it comes to parking hard-earned money or taking long-term bets with life insurance. This probably reflects the conviction that the government stands behind these banks and companies, which therefore are safer. What would happen if that were not the case? You might well see a flight to quality. From that perspective, if you look at efficiency ratios, the public sector banks simply do not measure up. In essence, they are not strong in their capacity to assess risk, which lies at the heart of banking. Or else, they are overly influenced by external pressures when deciding on loans. Either way, state-owned banks have poorer asset quality, do more loan write-offs and therefore need fresh capital.
This is not to say that private banks have uniformly been success stories, or so many would not have disappeared off the map (three among the new ones - Global Trust, Centurion, and Times - and more among the older ones). And who is to tell that there will not be more like them? Still, with a quarter of banking assets, private and foreign banks account for only a seventh of bad and doubtful loans. The key point is that if a private bank runs into trouble, the Reserve Bank takes corrective action (usually merger and therefore change of management), so the damage is contained. In the public sector, the government pumps in fresh capital, so market discipline does not operate in the same way. Should this periodic burden on taxpayers continue indefinitely, even as more private bank licences are issued, or will public sector banking get reinvented before it is too late?