Privatising banks is essential: Arizona State University Economist Mehra

Mehra said that the bureaucracy is not going to voluntarily do anything that diminishes its influence

Eliminating onerous regulations is the first step in reforms that India needs to take towards its goal of becoming a developed country by 2047, said Rajnish Mehra, economist, Arizona State University. In conversation with Ruchika Chitravanshi in New Delhi, Mehra stressed that lateral entry in the government is critical and added that the bureaucracy is not going to voluntarily do anything that diminishes its influence. He said that it will take strong leadership from the Prime Minister to push these changes through.

 

You have talked about the need for reducing the government's involvement in the financial sector. What are your suggestions?

 

Privatising banks is essential. Government involvement often crowds out private capital, which is critical for growth. When we talk about stimulating growth, it's essential to ensure that capital is available for productive investments. Privatisation would enable the banking sector to better allocate resources.

 

India wants to become a developed country by 2047. What should be the key reforms we need to undertake? 

 

Even small differences in growth rates can have significant impacts over time, thanks to compounding. However, sustaining rapid growth rates for long periods is extremely challenging but achievable. South Korea is one example. The first step should be eliminating onerous regulations. From my discussions with many executives, a universal complaint is about the multiple layers of bureaucratic red tape. Streamlining this process so that approvals are handled in a "one-stop" fashion would be a huge step forward. 

 

Second, privatising banks would improve the screening of investments, which is critical. It's not just about how much you invest but also about the rate of return. There’s a fundamental difference between growth and expansion. Real growth requires investing in projects that yield returns greater than the cost of capital. Bureaucrats are often not the best judges when making these decisions on investments. 

 

Finally, a key bottleneck is the legal system, which needs reforms to support faster dispute resolution and contract enforcement. This is crucial for expanding the corporate bond market, which would broaden financing avenues and support growth.

 

You said bureaucrats are not best equipped. We've had a whole debate around lateral entry in the government. How do you see it?

 

Lateral entry is critical today. The generalist model of the Indian Administrative Services, effective decades ago, now needs to be supplemented with experts with specialised knowledge in areas like technology, finance, and public policy. Lateral entry would bring fresh skills and perspectives that modern governance requires.

 

What should be done?

 

We need a dedicated talent pool, particularly for ministries like finance, as well as institutions like the Reserve Bank of India and Securities and Exchange Board of India. If you want young, skilled individuals with cutting-edge knowledge, why would they join if they don’t get respect, independence, or competitive salaries? India could follow Singapore’s example and offer market-competitive salaries to attract top talent. Every system tends to preserve itself and that’s exactly what’s happening. The bureaucracy is not going to voluntarily do anything that diminishes its influence. It will take strong leadership from the Prime Minister to push these changes through.

 

India is banking a lot on its demographic dividend. How do we use it to our best advantage? 

 

India has immense potential. However, we need to take the right steps to harness it. We are growing largely through services, not manufacturing, which is unique. For this model to succeed, we need to invest in education — at least a high school education of high quality.

 

China was able to grow through manufacturing, which doesn’t require a highly educated workforce. To truly benefit from the demographic dividend, education and private-sector job creation are critical.

 

What do you think of the PM internship scheme that has been launched recently? 

 

Germany has long had a system where, instead of going to college, young people can opt for apprenticeships with companies. India could benefit from a similar approach, but the scale needs to be much larger. For such a vast country, more companies must be willing to take on interns. This initiative is a good start, but it needs broader implementation.

 

What do you think of Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA)? 

 

As a humanist, I think MGNREGA is a good initiative. It provides a safety net for people. However, from an economist’s perspective, there’s a downside — it can sometimes discourage people from seeking alternative employment opportunities. In the current scenario, I believe it’s essential.