Two weeks ago, Arvind Panagariya—renowned free-market economist, chairman of the 16th Finance Commission, and former NITI Aayog vice-chairman—delivered a lecture at Lok Bhavan, Thiruvananthapuram. The event was part of Governor Rajendra Vishwanath Arlekar’s commendable initiative to open the aseptic corridors of the colonial-style residence to the public and bring domain experts into dialogue with local audiences.

Panagariya made a credible, evidence-based case for rapid urbanisation as a growth engine, advocating an increase in India’s urban population share. However, during a post-talk interaction, he reiterated a troubling, long-held view: India should privatis­e all public sector banks (PSBs), retaining only one—the State Bank of India (SBI). In 2022 paper of Niti Aayog, he had said that even SBI needs to be privatised — Let’s have a breather after privatising all others and then do the same to India’s banking icon.

In line with this philosophy, the number of PSBs has already been pruned from 27 prior to 2014 down to 12. The ruling establishment can take credit for this consolidation. The rationale has merits. Why would any owner of capital sustain a structure where competition is created inter se among its own entities in the same line of activity? Whether this creative destruction has genuinely benefited the broader economy remains unstudied and therefore unvalidated. On such structural shifts, one is reminded of the famous quote attributed to Zhou Enlai regarding the impact of the 1789 French Revolution: "It's too early to say."

Panagariya’s proposal aligns with the Centre's 2021 Strategic Disinvestment Policy, which envisions a bare minimum state presence in financial services. Yet, his hypothesis raises at least “seven” significant concerns that demand a deeper critical scrutiny.

1. Ideological Contradiction: A total exit from public banking directly clashes with the ruling party's foundational commitment to "Gandhian Socialism" and Deendayal Upadhyaya’s philosophy of Antyodaya (uplifting the last person). Unlike Amartya Sen’s model, which prioritises concomitant equity alongside growth, Panagariya’s growth-first agenda relegates social welfare to a secondary and subsequent concern. The guiding principle of economic policy has to be rooted in the principle of “integral humanism” and an economic structure suited to our “national genius”.

2. Abandonment of Financial Inclusion: Private banks naturally practise "class banking"—catering strictly to segments which give higher returns for capital deployed. Their profit motive is understandable, and they can never be expected to shoulder "social banking." The numbers below tell how this stark difference plays out:

Regulators and the Government have no mandate to monitor private banks for ignoring Financial Inclusion initiatives, even the pet scheme of bank accounts for all, piloted by the Prime Minister.

3. Privatise profits, nationalise losses: When private institutions fail, public funds absorb the blow. We saw this in 2008 on a global scale. The Bank of England Governor Merwyn King said, “Banks are international in life but national in death”. The West spent trillions of dollars of public money to fend off the impact from the collapse of giant private banks. In India too, the forced rescue of Yes Bank—with major public sector banks investing and SBI providing turnaround leadership—is a recent example. Not long ago, the Government reached out to rescue Global Trust Bank. These expose the flaw in the uninhibited privatisation logic. The government recently converted massive dues from a private telecom company into shares. The Indian public have now become “proud” owners of a loss-making telecom company with maximum shareholding. Value-generating and profit-making public sector units will of course be lapped up by private enterprise.

4. Undermining the overall public character: Though private banks have been licensed post-1991, the Indian banking sector has an overall public character. SBI has sustained its dominant market share of close to 25% even in a grossly unlevel playing ground. Its leadership has been top-flight and can stand shoulder-to-shoulder with the best in the banking world. And so far, the greatest strength/quasi-equity of the Indian financial system is “Trust in the Sovereign” of the people. The overturning of the public sector character of our banking system will undermine this “Trust”.

5. Erasure of regional touchpoints: India’s regional financial needs vary drastically. PSBs enjoy localised trust: examples being Canara Bank in Karnataka, Punjab National Bank in the north, Punjab & Sind Bank in Punjab, Bank of Baroda in Gujarat, Bank of India and Bank of Maharashtra in Maharashtra, UCO Bank in the east, and Indian Bank/IOB in Tamil Nadu. The other three banks too have local flavours. Replacing this rich ecosystem with a single monolith would sever crucial regional credit networks, denying banking access for the likes of street hawkers, small farmers, and micro-enterprises. The proposers of privatisation also forget that the Regional Rural Banks are all sponsored and governed by the government banks. What will happen to them has not concerned the purveyors of the private sector.

6. Concentration risk: Funnelling state banking into a single institution creates an acute "Single Point of Failure". Even an institution as robust and resilient as SBI could carry unprecedented concentration risk. A major operational or solvency crisis then could freeze credit transmission and trigger a nationwide financial collapse.

7. Operational inefficiency and monopoly: A single state bank could morph into a bureaucratic monopoly in subvented and subsidised credit delivery. Devoid of peer competition, its drive to implement government-sponsored welfare schemes for the poorest citizens could inevitably get slowed down.

Panagariya’s current articulation is not new. In a 2022 paper co-authored with Poonam Gupta (now Dy Governor in the RBI), he argued for winding up all PSBs, treating SBI’s initial retention as a temporary concession before total privatisation of Indian banking.

This framework reflects an uncritical adoption of a Western market doctrine. It highlights the fiscal costs of bank bailouts following NPA clean-ups, while ignoring evidence—such as analysis by fund manager Deepak Shenoy—showing that the government ultimately earned net returns from its capital infusions.

Given India's current development stage and per capita income, privatisation will be anti-equity and anti-poor. It ignores the lived realities of rural micro-enterprises and threatens the foundation of development banking for millions living on the margins. The Niti Aayog prescription demands rigorous public debate. In my view, it actually demands an unequivocal rejection.