The bad loan crisis in the public sector banks (PSBs) has had an unintended consequence. It has curtailed the ability of the PSBs to raise money from the stock market. The share prices of the PSBs have taken a battering and hence it doesn’t augur well for the majority shareholder i.e. the central government. However, it’s easier to raise money from taxpayers to fund the same banks.
The real owner of the banks (citizens) don't ever demand dividend, except for when the government has run up a deficit. This money is deposited into the government kitty called the Consolidated Fund of India that we always hope is used for the benefit of citizens.
Finance Minister Arun Jaitley assured the Lok Sabha, during a discussion on the union budget, that the government would fund the PSBs as and when the need arose. The central government is going to infuse around Rs. 25,000 crores this financial year and around Rs. 10,000 crores each in 2018 and 2019 in PSBs. This is required to meet the minimum capital requirements as per international banking norms and also to deal with the disastrous bad loan situation in PSBs.
As the majority owner of these banks, the government has two options – sell shares to the public or raise taxes and pump in more money in the banks.
It’s a mystery why any shareholder would pump in money into a business that is giving bad returns. But when you can raise the money at zero cost through taxes, it ceases being a problem. Indians are being cheated of their tax money.
Banks and the economy
Banks lend money to businesses and who invest in projects. Investment in new projects will help in generation of employment. Employment leads to income generation and the income spent will lead to business opportunities for many more. This is the crux of the trickledown theory.
When a private bank needs to raise money to fund its business, it will either raise money from the market or raise a loan or sell shares to a financial institution. The government also has similar tools available to it. But, selling public resources (shares in PSBs) means the revenue has to be maximized. The shares of the PSBs are not the best available option for investors. Hence, selling shares in the stock market to raise money is out of the question for now.
The track record of the PSBs in past has been quite abysmal. After a diktat from the Reserve Bank of India in December 2015, the banking industry got its act together and started recognizing all the bad loans of the past. Many banks, including private sector, didn’t declare a lot of their loans as non performing until the RBI pushed them. This has led to a huge public outcry because PSBs use taxpayer money to fund their businesses.
Tax money and its use
The government of the day decides what it should do with the money that it has raised through taxes. But when it raises the money that these banks need from the citizens when there are competing requirements like healthcare and education, this move becomes a little tricky.
There are competing requirements for government expenditure. The fact that Indians pay taxes that is used to invest in banks means that public expenditure is funding many businesses in India. It is surprising that we have gone on with this charade for ages. Nationalization of banks has created a problem that we don't know how to get out of. And now we are spending public money on businesses that the public should never be invested in. What we should be investing in is health.
India has abysmal public health infrastructure. We are moving towards a public-private partnership model for primary health care as shown by Rajasthan. There is also a move towards a health insurance based model. This means lesser government expenditure on primary health care and in the future we may move to full health insurance model. A recent proposal by NITI Aayog also calls for outsourcing primary healthcare to private doctors.
Public health being a state subject means the central government policies will trickle down to the states eventually. That would mean less public expenditure on healthcare in the future. People who can't afford healthcare would be given subsidized health insurance at a bare minimum level and would be left to fend for themselves.
Minimum government?
The fact that we still have our central government owning banks is a joke in itself. This is not minimum government and maximum governance. This is the government being still in the business of lending money. This a far cry from the prime minister’s election rhetoric of “government has no business being in business.”
Here's hoping we find productive uses for tax money that all the government's raise. The rush to privatize most public services like healthcare, education, sanitation etc sounds nice in theory, but if we don't have a regulatory system to take care of the problems that might arise, we are killing the system. Small government doesn't mean that it's a fire sale of the government.
