India's Reform Journey Revisited - Bhargavi Zaveri, NUS Faculty of Law

What is one reform that was overlooked in 1991?

I think the 1991 reforms miss bank privatization, and I thought it's a big miss. In hindsight, it was something that should have been done. It should have been priority number one. If you think about it, so it's one of the dreams or rather the prophecies of the Communist Manifesto, which is that centralization of credit in the hands of the state and the state being the monopoly banker in the country.

That leads to so many problems. India has played out that story of what are the consequences of realizing that prophecy. I think the reason why bank privatization was important in 1991 is because if we look at these 30 years since then, what we see is, number one, it was a huge disservice to the depositors. Right from a big issue like the financial soundness of such banks, what you see is that the government has the power to appoint management, the auditors, et cetera, and many of those posts are left vacant for a very long period of time.

Many of them actually have candidates who wouldn't have been on the board of any bank from the perspective of prudence. Right from the decision-making structure to the service levels. I think public sector banks were a huge disservice to the depositor. I think they were a huge disservice to the investor, which is the government of India. Taxpayers have bailed out public sector banks over and over again with the most recent bailouts in 2017. I don't think there is any count of how many bailouts, what is the volume of these bailouts, what is the opportunity cost of investing that same money in building infrastructure or doing other things for the country, for no good reason.

People know how well-run banks are operated. There is no reason that we would have degenerated into that kind of an outcome. I think  it was huge disservice to the credit market itself. Economists love talking about this. Credit market distortions. When government controls the bank, is it really commercial and credit and prudent decision-making that is driving your loans, or is it something else? The problem with the state controlling banks is that credit is driven towards, number one, sectors that the state believes are important, need not be.

They may be, but they need not be, but that basically fuels central planning. Number two, often credit is driven towards sectors or individuals which is nothing but a function of capture of the state by those individuals. We've seen a lot of that play out. Finally, I think it was a disservice to the borrowers themselves. This is where I think the biggest argument is against privatization of banks. It is believed that privatization of banks actually led to huge financial inclusion at a level that wouldn't have happened if banks wouldn't have been taken over by the state.

I would like to disagree with that because if we just take a step back in history, in 1955, we actually nationalized the Imperial Bank, which is now the State Bank of India. The State Bank of India then had a one-third market share of banking in India.  The state was already controlling the largest commercial bank by 1955-1956. There were amalgamations of banks that were operated by princely states, and those banks also got absorbed into this Imperial Bank or the State Bank of India.

By 1960, we are already in a situation where the state is the owner of the largest commercial banking network in India. Then what do you do? RBI starts reducing the number of bank licenses. In 1951, the number of banks in India is in the range of about 570 banks. By 1960, we had about 92 banks. The state is the controller of the largest banking network, and you're not giving new licenses.

Maybe that is what led to slower financial inclusion. Maybe if we would have taken a different approach towards allowing banking to function in a competitive manner, maybe we would have seen a better outcome on financial inclusion by 1979 by which time people felt like nationalization of banks is the only way to make sure that credit goes to all segments of society. Yes, I think bank privatization was a big miss, and the country has really paid the price for it.

What is one reform that India needs today?

In 2023, I wouldn’t say bank privatization is the one reform that's needed today because I think now the only way to do this is just to increase the market share of private sector banks. Hopefully, that should bring down the impacts of public sector banks on all of us. I think the one reform that is needed today in 2023 is the judicial services delivery.

I don't know if you would call this a reform, but it's more a reorientation of attitude towards courts. We've always seen justice delivery as a sovereign function, but actually a lot of sovereign functions are measured-- They're held up to the standards of any service delivery. For example, today, if I don't get my welfare benefit on time, I'm going to hold the government accountable for you promised me ₹5,000 in my account. I'm a farmer. It didn't come on time. I'm going to hold the government to account for that.

A lot of sovereign functions such as, for example, tax refunds. We hold the government accountable for things like, "Oh, the refunds have suddenly started coming late." We've now normalized getting tax refunds in a relatively short period of time. If we look at justice and courts in the same way. We still view justice as something that's you cannot question why the judge is not taking up your matter on the day that he scheduled to take it up.

 Once you actually start seeing justice delivery as a service that is rendered by the sovereign, you are more likely to take a much more user-friendly attitude towards courts. What does that mean? It means that today we talk of courts in terms of aggregate pendency numbers, how much time does it take to dispose of cases, how many cases have been pending. When a litigant enters the judicial delivery system, he doesn’t care about the pendency of that court. He doesn't care about whether there's a judicial vacancy. He cares about when will his hearing happen.

Will the hearing happen on the date that it is scheduled to happen, or will he just come to court and go back? When will his case get disposed of? How many hearings on an average will his case take? These are very basic questions. Unless we actually adopt a user perspective on how courts should function as opposed to saying, "Oh, lot of pendency. Let's make judges' lives easier or administrators lives easier." I think if we actually use the litigant as the lens for evaluating court performance, we will start measuring courts in very, very different ways. I think that's an approach that's underappreciated, and that's one way of re-envisioning court reform.