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A lot of analysis that has been aired on the sale of Air India to the Tata Group has criticized the government for selling the airline at a low price. The argument being offered is that, given the assets this air carrier has, the Centre could have sold it for a higher price. But the fact of the matter is that the government only got two worthy bids for Air India.

Nonetheless, looking at the sale from just this point of view doesn’t take into account the accumulated losses of Air India, which grew enormously after the erstwhile Indian Airlines was merged with it and last stood at a whopping 77,376 crore. In the last four financial years alone, the airline incurred losses of around 29,000 crore.

The airline could stay in operation only because it was government-owned and banks continued lending it money. Loans to Air India were seen as lending to the Indian sovereign. Given this, the total debt of the airline, as of March 2020, had stood at 60,430 crore. This rose to 61,562 crore, as of August 2021. Not all of this debt was on account of its accumulated losses. Some of it was also because the airline borrowed funds to buy new aircraft. The government also invested fresh money into the airline to keep it going.

Any other private airline in this precarious position would have shut down years ago. The financial system would not lend to an airline that had been making such large losses for years on end. With this major factor taken into consideration, the sale of Air India should be looked upon as a government decision not to bear any further losses.

The Tata Group will now take over 15,300 crore of the company’s outstanding debt. The remaining 46,262 crore will be transferred to Air India Assets Holding Ltd. This is the amount that will have to be repaid by the government (read taxpayers) over the years. This is effectively the cost of delaying the airline’s sale (or refusing to shut it down) all these years.

Another criticism has been that the Tata Group now owns or has stakes in three airlines operating in India. This is something that can easily be set right by giving out more civil-aviation licences. In the aftermath of the covid pandemic, entrepreneurs may not be immediately interested in setting up new airlines, but this can’t continue forever, simply because very few Indians travel by air, and so the market has plenty of space to expand in the years to come.

Further, people who have praised the deal now want the government to build on this momentum and carry out more strategic disinvestments, i.e., sell more government companies, lock, stock and barrel, to the private sector. But that is a very obvious point.

The right way to carry the disinvestment momentum forth is to formulate policies that lead to the stock-market valuations of public sector companies going up in the years ahead. Take the case of ICICI Bank, a private lender, and Punjab National Bank (PNB), which is state-run. Data from the Indian Banks’ Association shows that both banks are more or less similarly sized. As of March 2021, ICICI Bank had total assets worth 12.30 trillion, whereas PNB had total assets worth 12.6 trillion.

As of last Friday, PNB’s market capitalization was 46,852 crore. This is less than a tenth of that of ICICI Bank, which was worth 5.04 trillion. One reason for this lies in the higher non-performing assets (NPAs) or bad loans of PNB, at 1.04 trillion as of June 2021, whereas those of ICICI Bank were at 43,148 crore. Bad loans are largely loans which haven’t been repaid for 90 days or more.

The difference in the two lenders’ market capitalization is not just because of the difference in their bad loans. The market feels that ICICI Bank is more likely to be run like a bank should be. It isn’t clear if the same can be said about PNB or other public sector banks (PSBs); hence, the lower market value. There are other similar examples. The market capitalization of State Bank of India (SBI) is just about a little more than that of Kotak Mahindra Bank, though Kotak is a puny lender in comparison with SBI.

Other than being in the business they are in, public sector enterprises are also used by the government to fulfil its social-sector objectives. In the case of PSBs, there is always the danger of their being pushed to give loans to industrialists close to the government.

To correct this, the government needs to allow managers of public sector enterprises to run them like businesses. This will help improve the stock market valuations of these companies manifold. Higher valuations mean that the government can keep selling some stake in these companies regularly to raise money. This money can then be used to fulfil the Centre’s social goals, including incentivizing banks and other companies to do what the government wants them to.

Imagine if PNB were worth even one-fourth of ICICI Bank. Now multiply that by all the public sector enterprises that are listed. On the flip side, this would mean that the bureaucrats and ministers who lord over these public sector enterprises would lose some power.

All the same, that would be an excellent way to keep the momentum generated by Air India’s sale going for years to come.

Vivek Kaul is the author of ‘Bad Money’.

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