Home / Opinion / Quick Edit /  Opinion | A clash over banks

Finance Minister Nirmala Sitharaman has suggested that India’s state-run banks saw their worst phase when Manmohan Singh was the prime minister and Raghuram Rajan was at the helm of the country’s central bank. Her comments at Columbia University, US, came days after Rajan critiqued the Narendra Modi government for its over-centralization and lack of a consistent vision to achieve economic growth. There is no denying that India’s economy is undergoing a painful slowdown. The country’s gross domestic product decelerated to a six-year low of 5% in the quarter ended June. Although belatedly, the government has woken up to the reality and initiated a slew of measures to revive the economy. Corporate taxation was cut last month in a bid to encourage fresh investments. Personal income tax, some expect, may be slashed next to catalyze demand.

Sitharaman is not off the mark in pointing out the bad shape public-sector banks were in under the Congress-led government. These banks were left holding a can of rotten loans after a lending spree set off by that government’s effort to stimulate commercial activity in the wake of the 2008-09 global financial crisis. A large chunk of dud loans today can be traced to that reckless if heady phase. It did not end well. A fiscal blowout, high inflation and a sputtering economy turned cheer into gloom within a few years.

That story is well documented. The question today is of India’s recovery. More than five years after Singh and his party lost power, the banking sector does not look much better. Instead,

we have seen a shadow banking crisis and a severe credit crunch. Arguably, Rajan had exposed many of its problems and tried to sort them out with stress tests for bank assets and new bad-loan norms, but long-term solutions are beyond the central bank’s mandate. What the sector needs are comprehensive reforms, the sort that would shield the sector from political influence, and these are for the government to carry out.

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