India's banking sector has demonstrated what we've always said: markets are good for everyone-the country, the economy, businesses and the common man. For proof, walk into your nearest bank branch. Employees are more attentive and polite, customer convenience is central to the services on offer and the table tennis tables, which were as much a fixture at the larger public sector bank branches a decade and more ago as tellers and ledgers, are now conspicuous by their absence.

A silent revolution has swept through the sector. The still persisting differences in décor and comfort levels are purely cosmetic. In fact, as our survey (Page 56) reveals, the likes of Corporation Bank, Andhra Bank and Punjab National Bank have even overtaken global biggies like Citibank and Standard Chartered Bank. Not just this; the sector has shown dramatic improvements in other areas as well. Non-performing assets, a euphemism for bad loans, have declined significantly, and loans to small and medium enterprises-historically subject to much tug of war between bankers and the government- is now a preferred asset class. Moral of the story: competition and an enabling environment are as important as proper regulation and strict enforcement of laws.

It's now accepted economic logic that a well oiled financial sector is a necessary prerequisite for rapid economic growth. It is here that the Indian banking sector-despite its reach, depth and diversity-may be found wanting. The truth is that our biggest bank, State Bank of India, will qualify at best as a mid-sized one by global standards; other large Indian banks like ICICI bank, Canara Bank and Punjab National Bank will be considered small; and most of the rest will be below the global radar. Consolidation is the obvious way forward, but regulations in this regard are still hazy and unclear. The government needs to immediately introduce regulations to allow for rapid consolidation in the sector. And while at it, it should also allow voting rights in line with shareholding. This will pave the way for the infusion of fresh capital in the sector and prepare them for life in the post-Basle II era. This is a window of opportunity that will close unless immediate action is taken. It will be a shame if India Inc's triumphant march to the world stage is held back by a limping financial sector.

A Return To Fiscal Profligacy

Manmohan Singh: Paytime before polls

When elections loom large, fiscal rectitude becomes the first casualty. Few governments are known to eschew such populism for short-term electoral gains. And the populist United Progressive Alliance, a rainbow coalition of different parties that is supported, in turn, by the communist parties, could have been hardly expected to be different. With six statesgoing to polls this year, it was a great opportunity for the UPA government to be popular all over again. Hence, the announcement by the Prime Minister, Manmohan Singh, of setting up of a new Pay Commission should have hardly come as a surprise.

The Prime Minister-toasted for guiding India on the path of fiscal prudence during the early '90s- should have known better. The havoc caused in the implementation of the Fifth Pay Commission in 1997 by the United Front government must still be fresh in his mind. In one stroke, it raised the wage bill of the governments by as much as 1.5 per cent of the GDP and threw many weaker states into virtual bankruptcy. While it did make around 25 million babus happy, it was a nightmare for the governments of most states.

The wage bill of the Centre, for instance, jumped from Rs 21,885 crore in 1996-97 to Rs 43,568 crore in 1999-2000 and those of the states from Rs 51,548 crore to Rs 89,813 crore. And while the pay hike was implemented in full, the other recommendations were conveniently dumped. These included issues related to downsizing, transfers, and moving from periodic pay commissions to a permanent one that would constantly monitor inflation and other wage-related factors.

The Prime Minister's argument-the states are flush with surplus funds, around Rs 40,000 crore, and will not find it difficult to meet additional expenses-doesn't cut much ice. Their fiscal well-being can be directly attributed to the recommendations of the 12th Finance Commission, which increased the percentage share of state governments in overall taxes from 29.5 per cent to 30.5 per cent. In fact, the non-developmental expenditure of states as a percentage of their aggregate receipts jumped by nearly 6 per cent- from 12 per cent in 2003-04 to 18 per cent in 2005-06 -according to the Reserve Bank of India.

Any move to implement the new Pay Commission is fraught with a host of dangers. While it will lead to greater consumption because of the higher salaries, it will simultaneously see a reduction in social sector and infrastructure spending. The Centre, which skipped meeting part of its obligations under the Fiscal Responsibility and Budget Management Act because it had to transfer an additional Rs 26,000 crore in assistance to states because of the 12th Finance Commission, will now find another reason to defer the deadline for doing so. Another fiscal mess could see the country's sovereign rating plummet and dent the 'India Everywhere' story.

All That Steel

Lakshmi Mittal: Steel resolve

It could be that it is hubris that is behind Mittal Steel's bid for the Luxembourg headquartered Arcelor. Or it could be sound business logic. It could also be that the genteel sensibilities of the latter's CEO Guy Dolle may have been offended by Lakshmi Mittal's query, at a private dinner in his house in London just a few weeks before his company made its all-too-public bid, whether Arcelor would be interested in a merger. Or it could just be that he doesn't like Mittal the man since he has since mentioned that he doesn't quite trust him and that the finance and workings of his company, Mittal Steel, are opaque. Either way, this editorial isn't actually about Mittal's m18.6 billion (Rs 96,720 crore) bid (since risen along with the shares) for Arcelor to create a mammoth steel company with a market capitalisation of over $40 billion (Rs 180,000 crore). It is about an issue that countries and groups of countries (such as the European Union and ASEAN) across the world will have to address irrespective of the fate of the bid.

The Mittal bid for Arcelor could well be the template for other such hostile bids in the future. It may involve a large Indian it services company launching a bid for a large American it services firm. Or a Japanese carmaker for an American one. And the governments concerned may not even be shareholders (in the Arcelor-Mittal instance, the state of Luxembourg owns a 5.6 per cent stake in Arcelor). Yet, the governments involved will need to look at the merger closely (and not say the kind of things the leaders of most European governments said in the wake of Mittal's bid) simply because it will involve the fates of minority shareholders and, more importantly, employees in their countries. The final decision in the Mittal-Arcelor instance, may have to be taken by shareholders, but there is a role for stakeholders such as governments to play. The sooner governments figure out just what being a stakeholder is about, the better for business.