Free Press Journal

Systemic cure of PNB scam is required

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PTI Photo by Shashank Parade

The mistake made by Narendra Modi  is that we have unnecessarily  expanded the role of the government  in the provision of private goods.

The Punjab National Bank scam points to the need of a deeper cleaning of the bureaucracy. Anecdotal evidence indicates that Prime Minister Shri Narendra Modi has appointed a number of honest officials in key positions. However, it is business-as-usual for rest of the government servants. The Manu Smriti says about them: “Employees appointed by the king are mostly takers of property of others and cheats; from them the King should protect the people” (7.123). Likewise Kautilya says in Arthasastra: “Just as it is impossible not to taste the honey or poison that finds itself at the tip of the tongue, so it is impossible for a government employee not to eat up a part of government revenue. Just as it is not possible to find whether the fish moving under water is drinking water or not, similarly it is not possible to find out how much money the government employees have embezzled” (2.9). The challenge before Modi is to clean up this corruption.

The widespread corruption at the lower levels is brought out by an anecdote. An executive once lost his job. He told his servant that henceforth they would not use ghee on the roti. A week later he found that the ghee was getting less nevertheless. He asked the servant, why? The servant replied: “Sir, you have lost your job and you are not using ghee. But I have not lost my job and I continue to use ghee.” Similarly, the lower bureaucracy is telling the Union Ministers and Secretaries to the Government: “Sir, you have lost your corruption and you are not making money. But I have not lost my corruption and I continue to make money.” This is the story of the PNB scam.


This requires action at two levels. First, the role of the Government must be reduced. Economic theory classifies goods in two categories—public and private. “Public” goods are those that cannot be obtained by the individual in his personal capacity. These can only be provided by the government. These include services like roads, currency, defence, police and law. An individual, for example, cannot secure himself from attack by a foreign country in his individual capacity. The raising of an army and deployment along the borders can only be done by the Government. Similarly, currency can only be printed by the Government. In contrast, “private” goods are those that an individual can obtain in his personal capacity. These include education, health, housing—and banking. An individual can get a loan from the village moneylender, for example.

Government servants necessarily have to be given the task of providing public goods. This is a necessary evil that we have to live with. The mistake made by Indira Gandhi, and being continued by Narendra Modi, is that we have unnecessarily expanded the role of the Government in the provision of private goods. Indira Gandhi nationalised the banks ostensibly for providing banking services in the rural areas. This was unnecessary. She could have required the private banks to open branches in the rural areas just as the Reserve Bank of India (RBI) requires them to give a certain percentage of the loans to the priority sectors. The failure of RBI to regulate the private banks was sought to be managed by nationalisation. In the process, we created the unnecessary evil of Public Sector Banks (PSBs) bureaucracy. We jumped from the frying pan into the fire. We have similarly spawned a huge bureaucracy in the health, education, and housing sectors. The first step to reduce the recurrence of scams like that in the PNB is for the Government to withdraw from the provision of private goods like banking. This does not mean jettisoning of the welfare state. There are better ways of reaching welfare to the people such as Universal Basic Income Scheme, health and education vouchers, and employment subsidies to private businesses. Instead of “Minimum Government, Maximum Governance” we must move to “Minimum Government, Minimum Governance.” This will reduce corruption by reducing the size of the field in which corruption takes place, just as pollution is less in a small village compared to a large city. The Government has provided a huge capital infusion of Rs 80,000 crores to enable the PSU bureaucracy to continue their corruption. Instead, Modi must privatise these banks and earn a massive revenue 100 times this amount.

The second level of action is to increase social accountability of the government servants employed in the provision of public goods. The Second Administrative Reforms Commission established by the UPA Government had said: “The perverse system of incentives in public life, which makes corruption a high return low risk activity, need to be addressed…social monitoring through empowered autonomous and credible structures will have to be established even for the highest of the public offices.” In the same tone, the Fifth Pay Commission had recommended that external evaluation of the work of Class “A” officials should be get done every five years. Unfortunately, neither the UPA, nor Modi has followed up on this. Modi has demonstrated that he can take strict action against individual senior most government servants. One Home Secretary, for example, was shunted out because he interfered in a CBI investigation. This is not enough, though. Systemic reforms are needed. Modi must have the performance of the senior government servants evaluated by the public. We, the teachers at the IIM, were evaluated by the students. Government officials must similarly be evaluated by the consumers. A “Government Officials’ Evaluation Organisation” should be established along the lines of Central Vigilance Commission. This organisation should secretly evaluate the performance of the Class “A” officials by conducting surveys, sending confidential questionnaires to users of that service, and laying traps for corrupt officials. For example, questionnaires can be sent by post to 1000 consumers of an Electricity Distribution Division seeking their comments on the performance of the Executive and Superintending Engineers. Those at the bottom 10 percent of the results should be compulsorily retired.

Kautilya had suggested that the King should establish a spy system to trap corrupt government officials; and another super-spy system to keep an eye on the working of the spy system. The present anti-corruption organisations such as the Central Vigilance Organisation are reactive in nature. They act only when a complaint is made. Need is to establish a proactive vigilance system. This spy system must assume that every government employee is corrupt and lay traps on random basis. The two steps necessary for preventing a recurrence of PNB scam are privatisation of PSBs, and ensuring social accountability of all government servants.

The writer is a former professor of Economics  at IIM Bengaluru.