Dinesh Kamath's Editorial 'An attempt to resolve the banking crisis' that was published in Newsband

An attempt to resolve the banking crisis

Union Finance Minister Arun Jaitley announced a ₹2.11 lakh crore recapitalisation plan for public sector banks in India. Such a measure for recapitalisation has been welcomed by select stakeholders. The announcement has received generous reception from public sector bankers and private equity market players alike.

This move by the government became necessary because first, public sector banks have experienced a steady deterioration in the quality of assets. This deterioration has been happening since 2009 in the wake of the global financial crisis. Second, bank credit growth since 2014–15 has decelerated drastically and stood as low as 8.2% during 2016–17. Credit growth to the services sector decelerated to 7% in September 2017.

Policies such as demonetisation, and the rushed introduction of goods and services tax have only exacerbated this economic slowdown. Also, the Union Budget 2017–18 was quite lacklustre about the banking sector.

One wonders whether this move by government is owing to the elections in two states being just around the corner and the failure of the current government on the economic front which is looming large.

Some call this phenomenon as “lemon socialism,” wherein losses are socialised and profits are privatised.  Lemon socialism is a pejorative term for a form of government intervention in which government subsidies go to weak or failing firms, often with the intent of preventing further, systemic damage to what might otherwise be considered a free marketplace. These subsidies can even take the form of a full or partial bail-out, as happened during the 2008 financial crisis. The pejorative comes from the perception among free-market economists that failing companies are defective lemons that a working free market would replace with better-functioning companies in response to market demand, and the public-sector involvement this type of state intervention shares with socialism.

Confusingly, lemon socialism may also refer to government efforts to transition from capitalism to actual socialism; in this case it refers to a deliberate strategy of absorbing the losses entailed in saving jobs within the worst-performing sectors of the economy — the lemons — before the nationalization of more profitable industries.

Mark J. Green coined the exact phrase in 1974. The sentiment was earlier expressed in the adage "Socialism for the rich and capitalism for the poor", which was in use by the 1960s, and the notion of privatizing profits and socializing losses dates at least to 1834 and Andrew Jackson's closing of the Second Bank of the United States.