The State and the Market

(Published in Banking Services Chronicle October 2004)

We now enter the 12th year of our publication. Evidently, there has been a great support from our readers. Sometimes I wonder how a magazine that prepares students for public sector banks has been doing so well in an era of liberalisation and privatisation. But it is perhaps only a reflection of the times. There is scope for both — the public as well as the private. If privatisation has unleashed the earning potential of the Indians, public sector companies are increasingly making it to the Fortune 500 list on the other hand. If our magazine has Bank PO Practice Sets, it also has Mock-CAT.

Take the Global Trust Bank (GTB), for example. Even though its ship sank, hectic activity continued in the trading of its shares. This shows that the country now has a number of people prepared for taking big risks. We are witnessing a phenomenon that paves the way for developing a market in junk bonds.

Junk bonds are high-yield bonds issued by business units not good enough to be rated investment-grade. The motivation to invest in these bonds is the comparatively high yield they offer. It is so high that it compensates for their high risk of default on both principal and interest.

But the above rosy scenario has a downside too. And let me once again take the case of GTB. The government is trying to bail the bank out through its merger with the Oriental Bank of Commerce (OBC). Which could hurt the balance sheet of the latter by around Rs 800 cr. Now, many institutional investors that include the Unit Trust of India (UTI) and public sector insurance companies and retail investors hold about 33.5 per cent of OBC’s shares. If the merger were to erode the value of their equity, they would need to be compensated. And the burden would ultimately be on the taxpayer.

Or, look at the way we are afraid of the World Trade Organisation (WTO). The votaries of globalisation suddenly fall silent when it comes to ‘give’. They believe only in ‘take’. And this is also true of developed countries. Which often leads to stagnation of talks. Members of the WTO, developed and developing alike, need to understand that any agreement — globalisation being no exception — is a give-and-take process.

And a similar understanding needs to be evolved between the public and the private. Even the World Bank is softening. Listen to what British economist Barbara Harriss-White has to say: “... instead of counterpoising the State and market, as the World Bank used to, it now speaks of a partnership between them in order to provide the institutional infrastructure for market exchange ...”

Within the country, a line needs to be drawn between politics and economics. Though trade union activity may be legal, political bandhs can simply not be justified. The recent decisions of the Bombay High Court is welcome in this regard. It has imposed a penalty of Rs 20 lakh each on the Bharatiya Janata Party (BJP) and the Shiv Sena (SS) for organising a Mumbai Bandh last year.

Politics should be restricted to legislative activity. For the rest an autonomy needs to be given to those who are at the helm of their respective businesses, whether public or private. The government only needs to regulate. And even when it comes to regulations, consistency is imperative. If regulations are changed the way our textbooks are revised with every change of government, we would be heading for chaos.

Do you know why great brands are relevant? Because they change with the times. They tweak themselves to trends. They always reinvent. We at BSC seem to have understood this. And let us hope this understanding dawns upon Brand India as well.

If the country has its eyes set on stars, we need to cultivate a judicious mix.
Where the State and the market do not compete but co-operate.