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CommentMay 27 2014

India's new prime minister faces banking test

There is a lot of hope pinned on India's newly elected prime minister Narendra Modi. But, with so many economic – not to mention social and political – problems to be tackled, can he live up to expectations?
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Dramatic political victories lead first to euphoria and then, usually, to disappointment. Two recent examples of this are Barack Obama’s presidential terms in the US and Tony Blair’s 10 years as UK prime minister. The former created huge excitement as the first African-American to hold the office, but has failed to deliver much in the way of deep reform. The latter will be remembered mostly for the controversial decision to invade Iraq.

Can India’s newly elected prime minister, Narendra Modi – described by one Indian economist in the Financial Times as “the most momentous election in world history” – break the mould?

The list of India’s problems that need tackling is a long one – stifling government bureaucracy, poor infrastructure, wasteful subsidy programmes, poverty, a faltering economy. Analysts such as Creditsights have noted that Mr Modi, a successful chief minister of the state of Gujarat, will not find it easy to simply transfer his Gujarat model of cutting red tape and promoting investment, to central government.

Aspiring political leaders transplanted to the national stage fail because they are unable to work the levers of power, are unable to overcome vested interests and are overambitious and try to achieve too much.

Mr Modi would do well to focus on fixing one or two major things early on in his premiership while he still has goodwill and strong support. One of these early tasks should be improving the structure of India’s banking system along the lines already proposed by the Reserve Bank of India. This would involve transferring equity states of the public sector banks (73% of the total industry) to a holding company and then privatising them. This would put all India’s banks on a level playing field, and would spur lending and growth. It would stop the state-owned banks being obliged to lend for political reasons and would improve their asset quality and capitalisation.

Mr Modi’s motto is “less government and more governance”. He could do worse than start his term in office by applying this to the banking sector.

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