Articles by T T Ram Mohan

The public sector banks have shown a remarkable transformation in the post-reform period. Profitability is comparable to international banks, efficiency and stability have improved and there is a convergence between PSBs and private banks. But the PSBs will be severely tested as disintermediation proceeds apace on both the asset and liability sides. Their survival depends on their ability to rise to the challenges ahead. Both unions as well as government in its capacity as owner have an important role to play in ensuring that PSBs are well prepared to meet these challenges.

Foreign institutional investor inflows into the Indian stock market have conferred several benefits - in terms of lower cost of equity, securities market reforms and corporate governance. However, more receipts are unlikely to increase these benefits, while the downside is the potential volatility in exchange rates arising from the fact that participatory notes constitute a large component. We are unsure about the origins of funds that go into participatory notes and we do not know whether they are permanent in nature. It is possible to derive the benefits of FII investment without having to put up with the uncertainties created by PNs. We do not need to dread FII flows, but neither is there any need to be fixated about raising them.

India's public sector banks lack a compelling rationale for consolidation. Contrary to the experience elsewhere, spreads at PSBs have not declined consequent to deregulation and profitability has improved sharply, making the Indian banking system the second most profitable in the world. The performance of PSBs, measured by the appreciation in stock values, has also been very impressive. It is hard to argue, against this background of improving performance, that greater size is the key to further performance improvement. At the very least, such a contention needs to be backed by rigorous research as to what constitutes the optimal size of assets in the Indian context.

A clear case for consolidation among India's larger public sector banks is yet to be made. These banks have been improving their performance consequent to deregulation, thanks to an enhanced commercial orientation, greater autonomy and injection of market discipline. They need to focus now on human resource development issues, risk management and technological upgradation. A preoccupation with mergers at this stage is not only a distraction, it could derail the steady improvement in performance in the banking system over the past decade.

This paper examines China's record of privatisation to assess whether it accords with popular perceptions in India of that country having proceeded vigorously with such a programme. The record shows that China has moved cautiously in its privatisation efforts. It has privatised only the smaller state-owned enterprises, and the state retains control over the larger ones. Over a period, China has also pushed through reforms of SOEs, and the empirical evidence is that their performance has improved consequent to such reforms. It could be argued that fullblooded privatisation might have produced even better results. However, given the possible implications in terms of job losses as well as the absence of effective governance mechanisms in China's underdeveloped capital market, its rulers may well have been justified in hastening slowly with privatisation.