Given that the political season has begun in earnest and that inflation is dangerously high, it is clear that we will see nothing but tactical moves on the economy over the next several months. Thus, this column is really a recipe for the next Finance Minister, whoever it turns out to be.
I am assuming here - reasonably I believe - that whatever the contours of the next government, there will be no change in the belief that continued deregulation is the only way to further galvanise the economy to even greater heights. I am also assuming here -perhaps foolishly - that the next Finance Minister will be as brave as Abhimanyu, and the next government as wise as Yudhishtira.
But, be that as it may, my recommended recipe is for the next government to sell its entire stake in all the public sector banks immediately upon taking office. This is hardly a new idea, but nobody seems to expect it to happen.
But, let us look at its implications. The current market value of the government's holdings in all the public sector banks is around Rs 168,000 crore (Rs 1,680 billion) - Rs 150,000 crore (Rs 1,500 billion) for the listed ones, and an estimated Rs 18,000 crore (Rs 180 billion) for the few unlisted ones. Assuming there is a 20% diminution in value because of the huge supply of shares, the government would rake in, say, Rs 120,000 crore (Rs 1200 billion)!
Obviously, this amount should be used to pay down a significant chunk of outstanding government debt, which would automatically ease interest rates, and, importantly, give the government enormous flexibility to increase developmental expenditure.
Equally significant, since this action would bring all Indian banking assets to market, liquidity in the debt markets would explode, resulting in a further substantial reduction in borrowing costs for the entire economy.
A deep and liquid money market, with a yield curve, would itself foster many of the opportunities so lucidly articulated in the Percy Mistry report. Growth would surge upward and - assuming by then the current inflation had subsided - we would surely hit the 10-12 per cent range.
It is worth reiterating that 12 per cent growth for one generation would see our GDP per capita (on a PPP basis) rise to the level of Canada or Austria today; at 8 per cent growth, we would simply get to today's Hungary.
Of course, nothing comes for free, and we need to assess the downside of such a dramatic move. First, and most obvious, is the political fallout. There are 700,000 public sector bank employees, who would, of course, raise hell; the Left would have a field day and the FM may meet Abhimanyu's fate. But bravery - and recognition as a leader, not merely a politician - is its own reward.
The second, and more important, cost - issue, really - would be the impact on equity. As Chacha Chandra has so patiently explained to me, the public sector banks have played a significant, if unsung, role in development simply by their presence in rural areas.
The existence of the bank leads to some (if modest) evolution in infrastructure and employment and, importantly, has had some (again, modest) impact on rural credit. Clearly, privatising banks would raise the threat that these even modest gains would slip away.
However, what if we were to use fiscal incentives to drive bank participation in rural credit, the way we have so successfully created pockets of industrial development in certain smaller urban areas? We could amend the Banking Act (to make sure that reversal would be very difficult) to provide an x% reduction in tax rate for every branch in a rural area that had more than y lakh advances during a financial year.
This would mean that a bank with [tax rate divided by x] effective rural branches would pay zero tax. Theoretically, Indian banking could become completely tax-free, which would hugely increase the value of banks.
Again, public sector banks that already have a huge presence in rural areas, would be able to sell their surplus branches - beyond those they need to become tax-free - at a premium, which would be a fair compensation for their years of service to the nation.
Net net, the government would likely get a much higher value for its holdings than the Rs 120,000 crore (Rs 1,200 billion) mentioned earlier.
More importantly, this scheme would ensure significant flow of credit to areas where it is needed. In fact, competition for rural assets could even result in rural credit ending up cheaper (on a risk-adjusted basis) than corporate loans. To my mind, the additional growth (and taxes) that this would generate would more than offset the loss in tax revenue from the banking sector.
The only downside I see to this idea - and I'm sure there are many I can't see - is that it would substantially increase the demand for skilled people in the financial sector, which could lead to another round of runaway salaries, which would make my life much more difficult.
But, if that's the price I have to pay for a much, much tastier economy, so be it. After all, the M&A and consulting opportunities this would throw up would, I think, more than compensate.
Can't wait for 2009!
