The Covid-19 pandemic has had a major effect on the Indian economy. More than 45% of households across India have reported an income drop compared to 2019. Further On 1 September 2020, the Ministry of Statistics released the GDP figures for Q1 (April to June) FY21, which showed a contraction of 24% as compared to the same period the year before. According to Nomura India Business Resumption Index economic activity fell from 82.9 on 22 March to 44.7 on 26 April. The country is in desperate need of financing and reform, but the Modi reform plans are not the most popular amongst bankers.
Banking operations across the country were affected as of last Monday, as the United Forum of Bank Unions (UFBU) have gone on a nationwide strike, protesting the proposed privatisation of two state-owned lenders. UFBU, which represents nine unions announced that as many as one million employees and officers would strike on Monday and Tuesday.
In last month’s Union Budget, the privatisation of two public sector banks was announced as part of the government’s disinvestment plan. This is following on from the government’s previous privatisation of IDVI Bank by selling its majority stake in the lender to LIC in 2019. In the last four years, the government has also merged 14 public sector banks.
More recently, in the government’s budget, Modi’s government said it would begin to reform the market, which will include selling state-owned companies, reforming agricultural and labour laws and much more. Two of Modi’s reform plans have been completed: (i) reducing corporate tax rate from 30 percent to 25 percent (ii) Allow for more than 50 percent foreign investment in defence. He currently has four projects that are incomplete and a further 24 reform plans that have yet to be started, many of which centre around privatisation (one example being Modi’s plan to fully privatize Air India).
Though Modi’s decision was controversial amongst public bankers, many economists believe that this reform will be vital, if India want to reanimate a sector that has been tarnished by chronic bad debts, slow credit growth and poor governance. The government plans to raise 24 billion through these reforms by selling its stake in multiple industries. India is one of more than 50 countries who are engaged in economic reform as they make the transition from inward-looking, autarchic economies to open, market-driven ones.
Though this reform is likely essential to opening up the Indian economy and escaping their socialist past, some economists believe that the government may risk going too far. The Reserve Bank of India (RBI) was criticised for their proposition of selling state owned banks with economists arguing that allowing conglomerated to own banks would allow tycoons more influence over more sectors of the economy. Raghuram Rajan, a former RBI governor and professor at the University of Chicago, told the Press Trust of India this month that “it would be a colossal mistake to sell the banks to industrial houses”.