The puzzle of IDBI Bank’s stalled privatization: Just what exactly is holding this sell-off back?

It is unfortunate that India’s government has decided to call off the privatization of IDBI Bank for now, as reports indicate. The disappointment is that this decision was reportedly taken in response to poor investor interest—as seen in low bids for the 61% stake on offer to corporate bidders. There are many reasons behind the process of what we in India like to call ‘disinvestment,’ a euphemism coined as a political shield against critics.

The money it raises is just one reason. It pales in front of another motive, one that has long been regarded as a free-market principle.Namely, that governments should not be in any business that the private sector can do as well, if not better. It was this aspect of India’s market reform agenda that led successive administrations to disinvest in a host of state-run undertakings across sectors over the past three decades.

It was an exercise that culminated in the most difficult and perhaps controversial sell-off of all, that of Air India in January 2022. For a government that has been keen to demonstrate its ability to bite the bullet on contentious reforms such as those related to labour, its call on IDBI Bank is puzzling. It risks sending mixed signals on the Centre’s commitment to structural reforms.

This puzzle is deepened by the government’s rejection of revenue maximization as its main motive for selling stakes in publicly held enterprises. To be sure, banking is a strategic sector—especially in an emerging economy like ours where public ownership of banks helps serve policy ends like financial inclusion. But we already have 12 public sector banks (PSBs) with a strong presence in this field; they account for 53.5% of all loans, against private lenders’ share of 41.5% (at the