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Government Business is not Commercial Business: Privatising Air India and Beyond

10-Oct-2021Charan Singh

The Government has successfully privatised Air India after nearly 20 years of efforts. The Tata airline which was in existence from 1932 has witnessed many phases. It was nationalised in 1953 and was pride of India. In 2001, under the Prime Ministership of Atal Bihari Vajpayee, privatisation of Air India was considered. Finally, after many rounds, in Oct 2021, the process has been completed. The Government needs to be congratulated for this brave initiative. The timing is perfect as other airlines in the private sector are building substantial business share. The choice of TATA also ensures continuing responsible behaviour. The bidding process also inspires confidence, especially the amount of sealed-envelope minimum price and that of the bids received.

Why not Government, Why Privatise?

The business of the Government is creating an eco-friendly environment in the country for businesses to flourish and blossom. The conducive environment thus created, encourages the private sector to invest, be creative, and avail the advantage to produce more. The more private sector produces, output increases, employment happens and growth takes place. If Government starts competing with private sector than the level playing field is destroyed and no one – neither Government nor private sector – benefits.

In a weak or underdeveloped economy, it may be necessary for the Government to establish norms and create productive assets in absence of capable private sector. Once the economy grows and the engines start firing, it helps the Government to withdraw form business and hand it over to the private sector to take it forward. In India, once the private sector airlines entered the Indian skies, Air India started suffering losses as private airlines started capturing profitable routes, competing out the national carrier. Losses mounted and the Government had to provide support from the national fisc implying using tax payers hard earned money.

The objectives of the Government and the private sector are different. The objective function of the Government is good governance, equitable distribution of wealth to achieve social justice, and creating an environment where growth is sustainable inter-generationally. The Government has also to consider another objective of creating employment, especially in a demographic rich country. The objective function of the private sector is in sharp contrast – profit making and brand building. Empirically, resources employed in the private sector are more productive and optimally utilised. For a growing economy, with young demography, private sector is more useful.

In the private sector, given profit motive for survival, many more minds work to explore job opportunities, and consequently effective/productive employment is generated vis-à-vis disguised employment in public sector.

The commercial enterprises operate on extremely competitive basis as compared with Government. The government always works on altruistic motive with a helpful hand. The private sector has a single motive – profit making. The staffing, including top management, in the private sector is trained accordingly while public servants are groomed differently. When private sector airlines start competing with a government airline, the differences in management styles become apparent.

Case of Air India – An anecdote

The operations of Air India were extensive as it was the official airline. In addition, having the support of the Government, it was operational on sectors where the private sector would not venture – smaller towns and in far-flung towns of North East India. Now that the private airlines have picked up, service to these cities and sectors would not be impacted.

One such sector which Air India pioneered was Delhi-Washington route, connecting the capitals of two great democracies. It was an excellent move and the passenger traffic started picking up. Air India did the spade work, built traffic on the route, popularised it and then abruptly it was stopped. Why? Air India had incurred a cost in setting up an office in Washington DC and making arrangements in an expensive terminal at the Washington Dulles international airport.

Thus, commercial enterprises in the public sector can get manipulated for non-economic reasons but not the private sector where the Business of Business is Profitable Business.

Economic benefits from the sale

The privatisation of Air India means that the stressed Union Budget will be able to allocate resources, on priority basis, to productive sectors and not subsidise one of the airlines.

The level playing field in the domestic airline industry will be established and competitiveness will increase – price of travel and quality of service should improve eventually.

The regulator will be able to evaluate the performance and penalise for any behaviour in an unbiased manner, especially if collusive price strategy is being adopted in the market.

Looking forward

The privatisation of national assets is not an easy task. In 1997, I was exposed to the challenges of finding an appropriate price of Navratnas then. What is an appropriate price? Does the stock market provide a clue? The stock market price is not a long term benchmark to determine the appropriate price. The current Government has achieved an iconic success in determining the correct price for sale of Air India, and the valuation is competitive. The Government and its competent officers need to be complimented for developing this expertise.

Public Sector Banks: The nationalisation of commercial banks was not done from the lofty ideals of ensuring a bank in rural areas, as it now turns out. The social responsibility argument furthered then in in 1969 and 1980 was basically camouflaging political ambitions. In any case, much water has flowed in the Ganges since then. The PMs Jan Dhan scheme has achieved resounding success giving rise to JAM trinity and impetus to Fintech start-ups. Thus, the privatisation of commercial banks in public sector should begin soon as loss making banks are regularly supported by a help from the budget of the Government. In recent years, Government has provided extensive support to augment the balance sheet of the public sector banks. Interestingly, trend of public sector banks was popular in many countries, especially those influenced by socialist pattern of economy. In almost all these countries, public sector banks have been privatised.

Asset Monetisation Program: The Governments asset monetisation scheme, recently announced, also needs to be implemented as it will provide resources to cash-starved fiscs, both at the centre and states.

Conclusion

The PMs call of Minimum Government and Maximum Governance is most appropriate in the current context of building India, recovering from deep scars of Covid. The US$5 Trillion economy cannot be achieved in life-as-usual attitude and would require thinking out of the box. requires enthusiastic and dynamic private sector participation. In view of the abundant talent and demographic dividend, the private sector has to shoulder increasing responsibility. While the Government is demonstrating willingness to share and shift this responsibility, private sector has to offer the shoulder, enthusiastically and happily, as TATAs, which does not always mean Bye-Bye, have done.