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Flirting with Nationalization




The recent episode of the flirtation by the ministry of finance with the idea of effectively nationalising the Infrastructure Development Finance Corporation (IDFC), resignations by seven senior executives of the corporation in response, and the subsequent backtracking by the ministry offers an unusual glimpse of the vestiges of the pre-reform-era thinking in the ministry. It also illustrates graphically the discipline the reforms have come to impose on the ability of the government to reverse course.

For readers who are unfamiliar with this fascinating episode, let me begin by recalling that IDFC is the largest private body devoted to infrastructure financing in India today. It was created in February 1997 to serve as a vehicle to channel private capital into commercially viable infrastructure projects and to advice the government on policy formulation in all infrastructure areas including telecommunications, power, roads, ports, civil aviation, insurance and banking. Currently, foreign investors including the British CDC, Singaporean GIC, American AIG and Deutsche Bank hold a 40% stake in the corporation. The State Bank of India (SBI) also holds a minority stake in it.

Recently, following the announcement by finance minister Jaswant Singh in his mini-Budget to invest $11 billion in infrastructure, the ministry began to look for a vehicle to channel these funds into relevant projects. According to published reports, the search quickly zeroed-in on the IDFC. Officials in the finance ministry began to circulate proposals that would increase the SBI stake in IDFC sufficiently to turn the latter into an SBI subsidiary.

Senior IDFC officials rightly viewed these proposals as effectively nationalising the IDFC. Without blinking, in mid-March, managing director Nasser Munjee and six other senior executives tendered their resignations in protest. Simultaneously, foreign investors began to threaten to pull out of the corporation in the event of “nationalisation.”

These developments captured the headlines in the national and international press including a report in the Financial Times of London that commands a global readership. The government saw the danger lurking behind its proposals and blinked, announcing publicly that it did not plan to turn IDFC into an SBI subsidiary.

This is good news since there was no sensible economic case for the take-over of IDFC by the government. Few financial institutions in India can boast the impeccable record and balance sheet that IDFC does. A tiny workforce of 85 professionals and less than 40 support staff, spread over seven different locations, runs the corporation with incomparable efficiency.

The corporation has no net non-performing assets (NPA), has paid a dividend to shareholders during each of the last three years and earns a return of nearly 25% on its investments. It receives the most coveted AAA rating from both CRISIL and ICRA and the highest rating of A for supervision from the RBI. On the advisory front, the senior IDFC staff members maintain a high profile in virtually all the bodies involved in the reform of the infrastructure sector including telecommunications, roads, civil aviation and power.

The main criticism of IDFC that has appeared in the press is that its lending operations have been too conservative and, thus, it has failed to serve the infrastructure needs of India . Notwithstanding the fact that the IDFC record in this dimension is at least comparable to those of other leading financial institutions — it has disbursed more funds in 2002-03 in the telecom and transportation sectors than its peers such as IDBI, SBI and ICICI — being a private-sector corporation, the decision on how much to lend and at what terms is solely its prerogative. If the problem is that it is exercising monopoly power by limiting lending operations, the answer is the creation of more such institutions, not its takeover by an existing bank.

The good news in this episode, however, is its forceful demonstration of the growing vibrancy of the Indian private sector. The sector now offers bright, efficient and hard working professionals sufficient opportunity to stand up to the government when it makes bad decisions. But the bad news is that there remains a weakness in the Indian administrative machinery that promises to divert the reform process in the future.

To be sure the initiative for the proposed take-over of IDFC could not have come from the finance minister whose commitment to transforming India into a state-of-the-art market economy is beyond doubt. Indeed, Indian politicians (with the major exception of Mr Murli Manohar Joshi) have been remarkably adept at learning from the successful experience of the past decade and a half.

For example, soon after the Vajpayee government came to power, Sushma Swaraj made public declarations that foreign investment will be permitted only at “our terms, otherwise not.” Yet, when she became the minister for information and broadcasting, it took her little time to open the controversial media sector to foreign investors.

Therefore, the initiative for the IDFC take-over likely came from senior bureaucrats whose response to the transformation in the approach to economic policy making has been at best variable. While some senior bureaucrats have moved to the reform frontier and indeed become enthusiastic and active movers of the frontier itself, many still remain convinced that they can do a better job of guiding the economy than the market. And protected within the steel armour of the IAS, these bureaucrats are not deterred from acting on their instincts.

The next government will have to place civil service reform high up on the agenda. As I have argued before, the positions of joint secretary and above must be opened to competition from all sectors. The task of making policy today is too complex to be left virtually exclusively to career bureaucrats. The British government, which largely placed our civil-service structure in place, has itself moved away from this model in recent years.