Has Prime Minister Narendra Modi’s governance brought about winds of change? Modi has just commenced his 26th year in public office. The IDBI strategic disinvestment, the largest FDI in India’s financial sector, carries a broader significance. The cabinet’s decision to divest it to a private entity, Fairfax, is a major step toward improving the efficiency of financial intermediation. It could signal lower capital costs. Even so, it will be a long haul.

The arc of capital reform has come full circle: From nationalising private banks to privatising a national bank. This matters because India’s cost of capital remains above that of ASEAN peers, weakening competitiveness. Within the domestic regulatory framework, the legacy burden of the cash-reserve ratio, statutory liquidity ratio and priority-sector lending circumscribes optimum credit allocation. A banking system steeped in PSU culture may not consistently give Indian entrepreneurs capital at a globally competitive cost.

In the past, I have lamented the tardy pace of reforms in India’s factors of production (land, labour, capital) despite the big changes of 1991. Post-Independence India was shaped by Fabian Socialism and a deep distrust of private capital. The nationalisation of 14 banks in 1969, and six more in 1980, brought 91 per cent of banking under public control. Political lending and recurring bad-loan crises were the deleterious features of this model.

I recall the mixed opinions when private banks in India were nationalised. That was an era of political dependence on left-oriented policies. The much-applauded far-reaching economic reforms of 1991 bypassed the structural changes needed in other factors of production. It took PM Modi’s leadership to implement the four labour codes.........

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