Modi govt needs to stop throwing good money after bad

The Modi government really hates selling off what it considers to be the Family Silver. Even if it is actually not silver but merely German Silver, and heavily tarnished at that. It is loath to give up on ownership of anything, no matter the cost. That has characterised all its disinvestments so far. It gets one big PSU to buy another, and pretends that the disinvestment is complete. Essentially, it might transfer direct ownership - but it keeps the company very much under its control. Meanwhile, the company making the acquisition coughs up the cash, though it may not find much synergy in the takeover.

Trying to retain ownership if you are serious about fixing problems at the company is not necessarily bad. You may have a long term vision about what needs to be done - make management changes and essentially take steps to turn around an organisation. Unfortunately, the Modi government has not shown any great desire to fix legacy problems in several of its portfolio of bad companies while also being reluctant to sell them off.

This can be seen in its lacklustre efforts to ask for bids for Air India. The ailing carrier is a millstone around the necks of the tax payers given that ultimately they pay for its endless and ever mounting losses. But the government has never seemed serious about getting someone to take the ailing carrier off its hands and use the tax payer money for something better - such as improving healthcare, agriculture or infrastructure.

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One case like Air India is bad enough. Much worse is the case of the 11 public sector banks put under prompt corrective action (PCA) by the Reserve Bank of India (RBI). Initially, the government had hoped to persuade the central bank to part with a third of its reserves and use it to recapitalise these banks and make them capable of going about their normal business of lending again. (And also meet the strict Basel III norms). After the enormous amount of controversy it generated, and the abrupt resignation of Urjit Patel as RBI governor, the government is now going a bit slow and following what should have been done in the first case - create a panel with impeccable credentials to decide how much reserves the RBI actually needs to keep at any time. The panel with former RBI governor Bimal Jalan as head, and former deputy governor of RBI Rakesh Mohan as vice-chair is exactly the right panel to make those recommendations. But they will take some time to give their report and in the meantime, the government is desperate to get the banks under PCA to start lending again - especially to small and medium entrepreneurs (MSEs), who have been hurt by the twin shocks of demonetisation and GST, and who are finding credit hard to come by in the current environment. That is why the government has announced that it will recapitalise the banks - with its own funds if it can't find any other means.

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The problem is not recapitalistion of the banks per se - the problem is that the government has shown no desire to fix the original problem of these banks: A demotivated staff, too compliant to political whims and fancies, not enough attention to risk management, and lax controls at every level. It hired two outside professionals to head and fix Bank of Baroda, then changed its mind and pushed for its merger with two other banks. Similarly, it created the Bank Board Bureau and then lost all interest in it. The Modi government may have drawn attention to "phone banking" as it dubbed it, but there is no indication that government pressure on the banks is reducing under this government. The push to give SME loans quickly is just another loan mela of the kind that Congress governments of yore used to unveil from time to time. There is nothing wrong with encouraging SMEs - in fact, the SMEs form the backbone of Indian manufacturing and trade. The problem is that pushing banks to give them loans, whether they meet the risk profile or not, is of little use if you have not fixed their core problems through other means. (And that means fixing the lingering issues with GST, and making it easier to get refunds quickly so that working capital does not get blocked for long stretches).

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In the absence of fixing the core management problems of public sector banks, the government is only ensuring that it throws more tax payer money into a bottomless pit.