Home / Opinion / The importance of privatizing Air India

Everything that could possibly go wrong with a public sector company has gone wrong with Air India. It is operationally inefficient and unable to compete with private sector operators. The airline has been grossly mismanaged over the years and now controversial decisions taken at the time of the United Progressive Alliance government are being probed by the Central Bureau of Investigation. It is tottering under a mountain of debt and is surviving on doles from the government. In fact, Air India is the perfect case that proves why the government should not be in the business of doing business.

As reported by Mint on Thursday, the Narendra Modi government seems to have finally made up its mind on privatizing Air India. Union finance minister Arun Jaitley has said that the NITI Aayog has given its suggestions to the aviation ministry and it will now explore all options for privatization of the airline. This is a step in the right direction and the government should now actively look for a buyer for a variety of reasons.

First, the 2012 turnaround plan has not shown the desired results. The government committed itself to infusing Rs42,182 crore of equity between financial years 2011-12 and 2031-32. However, the airline has not been able to achieve the targets set in the turnaround plan. For instance, as highlighted by the Comptroller and Auditor General of India, compared with the target of raising Rs500 crore annually through monetization of assets in the four-year period from 2012-13 to 2015-16, the company managed to raise only Rs64.06 crore.

Similarly, it has not been able to meet the operational targets. The company has accumulated debt of about Rs50,000 crore and is struggling to repay. To put the number into perspective, there are only about 50 companies listed on Indian stock exchanges with market capitalization in excess of Rs50,000 crore. The government will have to keep bailing out Air India with taxpayers’ money if it decides to hold on to it.

Second, at a broader level, going by the established norms of market economy, the government should not be in the business of providing goods and services where the private sector has a vibrant presence. And this applies to all businesses run by the government. As has also been elaborated by the 14th Finance Commission, the opportunity cost of such investments should be considered. In the case of Air India, the cost is a lot higher as it is consistently making losses and is dependent on the government for survival. Further, the presence of state-owned enterprise distorts the market. A firm with access to government finances and practically no fear of failing affects price discovery in the market and can hurt private sector operators in the

Third, divesting the loss-making Air India will send a strong signal to investors that India is serious about reforms and is no longer willing to throw good money after bad. This will also set an example and pave the way for disinvestment of other loss-making companies, such as Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL). There is no way that these companies will be able to compete in India’s hyper-competitive telecom market.

To be sure, it will not be easy for the government to privatize the debt-laden Air India. It will have to work with professionals and investment bankers to find ways and make the deal reasonably attractive for a prospective buyer. It will have to bring down the level of debt in the company. This can possibly be done by selling non-core assets. For example, one of its subsidiaries—the Hotel Corporation of India—runs hotels which can be sold to reduce debt. The government can infuse equity capital one last time to bring down the debt and make it attractive for potential buyers. If the financial institutions are willing, a part of the debt can be converted into equity. The government could also choose to start by selling a minority stake in the company and bring in a professional management.

The Modi government will need to explore all the options as the status quo cannot continue for long. The government has fiscal constraints and needs to spend more in important areas such as health and education. There is absolutely no rationale why it should be running a company like Air India.

Privatization is normally seen as a politically difficult decision, but for a government which had the political capital to withdraw 86% of the currency by value from circulation, selling inefficient loss-making public sector companies should be reasonably easy.

Should the government sell Air India? Tell us at views@livemint.com

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