AIR INDIA: RETURN OF THE MAHARAJA
The privatisation of Air India signals a decisive end to a Nehruvian legacy and a fundamental reset of the public sector. EPISODE #44
Dear Reader,
A very Happy Monday to you.
The big news last week was that Talace Pvt Ltd, a fully-owned subsidiary of the Tata Sons, won the bid for Air India. The price tag of Rs18,000 crore is in exchange for 100% equity in Air India, Air India Express and 50% stake in AISATS, the ground services entity owned by Air India.
After the no-show in 2018 when the National Democratic Alliance had first put the national air carrier on the block, most had given up hope that the public sector undertaking—which has become a big annual bleed on the exchequer with accumulated debts aggregating Rs61,562 crore—would be sold.
Undoubtedly the decision to privatise Air India is a watershed moment. Among other things it signals an ideological shift. Accordingly this week I focus on this development and its ramifications. This week’s cover picture is a poster about a previous avatar of Air India shared by a friend. And the headline is a spin off from the title of the third and final volume of J R R Tolkien's The Lord of the Rings.
A big shoutout to Gautam, Premasundaran, Vandana, Mr Mahalingam and Aashish for your informed responses, appreciation and amplification for last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button 😊.
If you are not already a subscriber, please do sign up and spread the word.
AIR INDIA: ACT 3
The decision on the winning bid by Tata Sons for Air India came on 8 October. Exactly a week shy of the day in 1932 when J R D Tata launched his audacious dream of running a commercial airline. Donned in white trousers and a short-sleeved shirt of matching colour, the 28-year old JRD took off from Karachi at 6.35 am for Bombay via Ahmedabad to deliver the first airmails in India.
I know about this thanks to the fantastic research by Siddharth Misra on the history of Air India. Sharing below the link to Siddharth’s must read twitter thread on it:
If he was alive JRD would have been particularly gratified that the airline is back in the Tata stable after it was taken away by the first government of Independent India in 1953. Especially since it also signals a formal end to the Nehruvian ideology, deeply influenced by the command-control regime pioneered by the central planning model in the erstwhile Soviet Union, of the “commanding heights” accorded to the public sector—inspiring the takeover of Air India.
The indications of an ideological reset were apparent with the ascent of Narendra Modi-led National Democratic Alliance (NDA). To its credit the NDA since it took over so audaciously in 2014 and then repeated its success in the 2019 general election has always made clear its intent to reinvent India’s policy lexicon. In fact PM Modi is on record saying that their government was elected “not to rule, but change India”. They have now begun to walk the talk in earnest.
The radical revision in its approach to public sector reform was made clear unambiguously in this year’s Union Budget presented by Finance Minister Nirmala Sitharaman. In the cover story on the Budget that Haseeb Drabu and I wrote for Open magazine, we had dwelled on this structural shift in thinking:
“This Budget is the first policy document of the Union Government which virtually writes the obituary of the Nehruvian legacy of a mixed economy and commanding heights of the public sector so decisively. The Nehruvian development model of the state’s all-pervasive primacy over individual enterprise has been finally turned on its head. As audaciously as Modi did in politics, Sitharaman has done it in economics.”
To be sure this policy shift has been in the making for decades. It is just that NDA is undertaking an unprecedented acceleration and expansion in the scope of change. Not only is it therefore a continuity in economic thought but the fact that successive regimes attempted to push the envelope to reinvent the public sector also reveals the bi-partisan support underlying this pivot.
Nehrunomics Revisited
Like I mentioned earlier, it was India’s first Prime Minister Jawaharlal Nehru who mooted the idea of placing the government—and within it the state-owned and state-run public sector undertakings (PSUs)—as the commanding heights of the Indian economy. It was formally documented in the Industrial Policy Resolution of 1956 and showcased in the benchmark Second Five Year Plan. Till the early 1980s, the PSUs continued to occupy the commanding heights, though by then there were sufficient misgivings internally that this model had run its course. But no one was willing to bell the cat as it were.
It was during Indira Gandhi’s last stint in power that the government commenced a rethink. On succeeding her as prime minister, her son Rajiv Gandhi undertook the formal move to unshackle the public sector.
Accordingly two big developments were initiated:
First, in 1987 Rajiv Gandhi spun off the two lucrative telecom circles, Delhi and Mumbai, and created Mahanagar Telephone Nigam Ltd. The belief was that as a corporate entity MTNL will be bereft of bureaucratic control. The thinking was that once unshackled MTNL would shed its PSU culture curbing productivity and take hold of the emerging opportunities in telecom.
Second, a fiscally strapped union government began to dial down support of the exchequer to the public sector balance sheet. This was done surreptitiously to avoid raising the hackles of the voluble Left wingers—who though small in number always punched way above their weight. And this was managed by gradually replacing budgetary support with commercial borrowings. So while the overall expenditure was maintained, the share of direct government support shrank. The moniker for this in the Budget lexicon was IEBR or internal and extra-budgetary resources.
However with the benefit of hindsight it can be safely concluded that the cure only worsened the situation. The glitzy and expensive MTNL makeover went nowhere and turned out to be old wine in a new bottle, marking another win for those keen to preserve status quo. Worse by forcing inefficient PSUs to borrow at market rates further eroded their bottom-line as they struggled to make the debt-service payments—forcing them to cut back on their investments.
The next big experiment in public sector reform was signalled by Yashwant Sinha when he served as finance minister in the short-lived regime of Prime Minister Chandrashekhar. Sinha proposed the sale of government stakes in public sector undertakings: disinvestment. However the idea was still-born because the government fell and Sinha could only present a vote-on-account—though he retained the proposal in his speech.
This is what got taken up as a big idea by the duo of Prime Minister P.V. Narasimha Rao and then finance minister Manmohan Singh. However, since the Congress party did not have the emotional commitment to public sector reform the divestment exercise remained largely piecemeal.
It was not until Atal Bihari Vajpayee formed the first Bharatiya Janata Party (BJP)-led National Democratic Alliance that full blown privatisation was attempted—though it ended up in controversy and political mudslinging. The return of the Congress to power in 2004 once again led to loss of momentum; though they continued to talk-up public sector reform the Congress-led United Progressive Alliance declined to walk the talk.
Enter Modinomics
The return of the NDA, this time under the leadership of PM Modi, led to a review of the laundry list for public sector reforms in earnest. It took them some time though before they reintroduced disinvestment and privatisation into the policy lexicon. The NDA tested the nation’s appetite for big ticket reform by putting Air India, the national air carrier, on the block. While political resistance was non-existent, investors spurned the offer. But they persisted and a revised proposal followed ending up in the sale of Air India last week to the Tata Sons subsidiary.
And this is just the beginning. As mentioned, earlier this year FM Sitharaman unveiled the plan for the big rejig of the public sector. Part of this year’s Union Budget the policy document made it amply clear that going forward the public sector presence will be restricted to: Atomic Energy, Space and Defence; Transport and Telecommunications; Power, Petroleum, Coal and Other Minerals; and, Banking, Insurance and Financial Services.
The statement annexed to the FM’s speech very candidly states that central government owned public sector enterprises in the “non-strategic sector” will either be “privatised” or “closed”. According to the FM the objective is to create “new investment space for private sector”.
It was the first time probably an official document presented to Parliament so openly made a case for private enterprise. And since the Budget, including the FM’s speech, is passed by Parliament the policy change is written in stone. The signal was clear: private sector would be an equal stakeholder in India’s future development; no longer is enterprise a four-letter word.
The Air India sale has only reinforced this sentiment. And India Inc has not missed the messaging. Sharing Anand Mahindra’s tweet after the sale:
Alongside, the FM provided a fresh boost to monetise existing public assets in infrastructure. Yet another unambiguous signal that the government is no longer into running businesses. Instead it will be handled by private enterprise. The guidelines for this were announced recently and a previous column had dwelled on it. If you are interested in reading it again please click here.
In the final analysis it is clear that the Air India sale was no chance occurrence. This high profile transaction captures a seminal shift in public policy. Now it is for the private sector to seize the moment as it were.
In this context I thought it only appropriate to conclude with the note shared by Ratan Tata immediately after the deal was announced in which he is also suggesting that India’s private sector is ready for the challenge.
Recommended Reading
It is that time of the year when some of us get immersed in Pujo celebrations, particularly in West Bengal. The covid-19 hangover is no doubt a dampener.
In the normal course the festivities trigger a burst of activity, often months ahead. The British Council actually conducted a study to measure the economic benefits accruing to the state economy of West Bengal.
“Durga Puja is not only a five-day festival in West Bengal but it connects the hearts of Bengalis and Indians across India and continents. It's a celebration of life in Bengal. The outcomes that emerged from the study was phenomenal. The report estimates the economic worth of the creative industries around Durga Puja in West Bengal at Rs 32,377 crore (GBP 3.29 billion, USD 4.53 billion), which is the size of the economy of many smaller countries across the world. Durga Puja accounts for 2.58% of the state GDP and is just a weeklong festival.”
The economic contribution of the business of religion to the state economy is quite revealing. If you are interested in reading the report please click here.
Till we meet again next week. Stay safe.
Anil spot on. In all the dust of Lakhimpur incident, Air India went home. Another very significant measure is the split of OFB. Should be in place by 15th Oct. Exciting times.
The revenue of the aviation industry is driven mainly by growth in tourism, business travel and personal travel; all three had taken a hit due to the environment created by Covid infection fears. This was not only the right time to sell the carrier but it was in fact long overdue, when one analyses the mounting debt. This government actually gave up the age old habit of having free rides that the previous governments had been enjoying. The loss was partly offset by making it mandatory for all government employees entitled to airfare for LTA and other travel, to travel by the Maharaja at about 3 times the fare on other airlines. This was an eyewash, in order to facilitate the free of cost travel of our elected Maharajas. This is one of the reasons for this very delayed action. The message is now clear that free lunches for loss making PSUs are perhaps over. Best of luck to the Tata group to turn it around into a profitable enterprise. An important article Anil, that will send out the message, loud and clear. Excellent piece of writing.