Opinion | More creative destruction and less regulation would help India4 min read . Updated: 21 Apr 2019, 11:29 PM IST
Jet’s woes reflect poor management and stiff competition. Neither warrants government intervention to keep a zombie alive
At the time of filing “In the Margins", Jet Airways was in a tailspin and heading for bankruptcy. That may have already happened by the time you read this. What concerns me here, however, is all the hand-wringing by politicians, the business press, commentators and the public that has accompanied the slow demise of what until recently was India’s premier private airline.
Regulators and analysts alike appear to view the imminent demise of Jet Airways as nothing short of a national catastrophe. Therein lies a clue to the immaturity of India’s brand of capitalism at present. It is true that the 1991 liberalization and its aftermath swept away the worst excesses of the licence-permit-quota raj, but the private sector capitalism that has thrived since then has been, by and large, rather heavily regulated and forced to live side by side with a still large public sector, in some cases competing with it directly.
It is perhaps because of the symbiotic, nascent and not fully mature brand of capitalism that India has nurtured, that no one—regulator, promoter or commentator—is willing to say, “Okay, Jet is in trouble. If it cannot repair itself, let it go bankrupt and have done with it."
It is salutary to remind ourselves that the essence of capitalism is not only the creation of new firms, but the destruction of old firms—indeed, a life cycle of firm birth, maturation, decay and death. The great Austro-American economist Joseph Schumpeter famously termed this a process of “creative destruction". Just as in the plant and animal kingdom death is a precondition for new life, old, moribund, value-subtracting firms must be allowed to die gracefully, rather than be perpetually kept alive through unwarranted regulatory forbearance or the injection of public funds that ought to be used better.
The new Insolvency and Bankruptcy Code (IBC) was intended to abet this process of creative destruction, but, alas, it has been all but gutted by recent developments and can be called yet another well-intentioned but failed reform of the present government. With a non-functioning IBC, promoters will continue to keep their firms alive as zombies as long as possible, sucking as much capital out as they can before they eventually collapse, often with plans to buy them back at pennies on the dollar. This is not a template for running a successful capitalist economy.
Let us also remind ourselves that what jump-started the deregulation and liberalization of the US economy and powered a quarter-century of growth was the deregulation of the airline industry as early as 1978, resulting in the eventual dismantling of the Civil Aeronautics Board in 1985. The airline industry in the US took off, competition burgeoned, and consumers gained from lower ticket prices, more routes and better service. While consumers and new entrants (both new consumers, who could now afford to fly, and new airlines entering the deregulated space) to the market gained, entrenched airlines that had been protected by the old regulated system didn’t fare as well. The most visible casualty was Pan American World Airways, or Pan Am, which collapsed in 1991, having been the leading American airline for much of the century.
The story of Jet Airways is a little different, being the first and most important new airline to be created after airline deregulation in India. The other difference is that Jet and other private carriers co-exist with Air India, a faltering public sector airline kept alive only through a steady flow of public monies. But the lessons of the US (and also European) experience remain no less valid. The travails of Jet Airways do not reflect some fundamental structural difficulty with the private airline sector in India that needs the heavy hand of government to come in and fix it. Rather, these reflect poor management decisions mixed with some bad luck (in the form of, for instance, fluctuating oil prices), along with intensified competition from new carriers nipping at Jet Airways’ heels. None of these are good enough reasons to warrant government intervention to save the airline. Indeed, intensified competition, abetting the process of creative destruction, is something to be celebrated.
Alas, with an election unfolding, it will be rather tempting for the government to intervene to prevent the bankruptcy of Jet Airways, lest it be called yet another failure on its watch. Yet, if Jet Airways were to fold, this would reflect the failure neither of the current government nor of previous governments, which deregulated the sector. It would be the ebb and flow of creative destruction, an entirely normal—indeed necessary—process for private sector capitalism to function well.
If the government were wise, it would allow market forces to take their course and let Jet Airways sink or swim as the tides of those forces determine. That would be an early and promising sign of the maturing of Indian capitalism. However, if the government does intervene at the eleventh hour to keep Jet Airways afloat, it will be further confirmation that capitalism in India remains at a woefully immature stage of development.
Very likely, the ultimate fate of the airline, and indeed of other firms that will get into trouble across many different sectors, will fall on the next government. Let us hope that they have read not only their Adam Smith and Karl Marx, but also their Joseph Schumpeter.
Vivek Dehejia is a Mint columnist