Privatization of Air India

Privatization of Air India

• In 2000–01, attempts were made to re-privatize Air India. In 2007, Air India and Indian Airlines were merged under Air India Limited
• The combined losses for Air India and Indian Airlines in 2006–07 were 7.7 billion and after the merger, it went up to 72 billion by March 2009. By March 2011, Air India had accumulated a debt of 426 billion and was seeking 429 billion from the government.
• In 2013, the then-Civil Aviation Minister Ajit Singh stated privatization was the key to the airline’s survival, however the call for privatization brought in strong opposition led by BJP and the CPI(M).
• Air India reported an operational loss of Rs. 246.14 crore in the April-June quarter of 2016.

Current Issue

• The Economic Survey 2017 recommended that the government privatize Air India. The state-owned airline has a debt of about Rs50, 000 crore.
• The Narendra Modi government has decided to privatize Air India. Finance and defense minister Arun Jaitley has said that on the basis of the suggestions provide by NITI Aayog, the civil aviation ministry has been asked to plan for the privatization of Air India Ltd.
• This is the most explicit stand on the airline by the government so far.

What is the Need for Privatization?

• 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 is being probed by the Central Bureau of Investigation.
• Considering the financial dimension, 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.
• As highlighted by the Comptroller and Auditor General (CAG) 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 out of which and is struggling to repay. The government will have to keep bailing out Air India with taxpayers’ money if it decides to hold on to it.
• Considering 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.
• Furthermore, 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 business.
• Another point is, disinvesting 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.

Aspects to Ponder On

• As NITI Aayog Chairman Arvind Panagriya highlighted, the issue that comes with the privatization of the airlines is the potential buyers. Whether only national buyers or the foreign buyers should also be allowed to bid, is something that has to be decided on.
• Panagariya noted that another issue is if the government should retain some stake in it, however small, “because there is the issue that it (Air India) is a national carrier and therefore, we should maintain that”.
• Thirdly, Mr. Panagriya stated that since the amount of debt is humongous, the debt issue has also to be taken care of. The question largely is whether the government of India writes off the entire debt or some part of it.
• The government has fiscal constraints and needs to spend more in important areas such as health and education. There is absolutely no rationale in exhausting resources in running a company like Air India
• The government will need to explore all the options as the status quo cannot continue for long.

Prospective Solution

• 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.
• The government will have to bring down the level of debt in the company. This can possibly be done by selling non-core assets.
• 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.