Privatisation of Air India

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Recently, the government announced its decision to sell all its stake in Air India (AI) as well as AI’s stake in two other businesses — Air India Express Ltd (AIXL) and Air India SATS Airport Services Pvt Ltd (AISATS).

History of Air India (AI)

• Established: 
  • AI was started by the Tata Group in 1932, but in 1947, as India gained Independence, the government bought 49% stake in AI. 
• Nationalised:
  • In 1953, the government bought the remaining stake, and AI was nationalised.
  • For the next few decades, the national carrier dominated Indian skies. 
• Problem:
  • However, with economic liberalisation and the growing presence of private players, this dominance came under serious threat. 
  • Ideologically too, the government running an airline did not quite gel with the mantra of liberalisation.
• Loss making entity: 
  • By 2007, AI (which flew international flights) was merged with the domestic carrier, Indian Airlines, to reduce losses. But it is the mark of how poorly the airline was run that it has never made a profit since 2007.
  • In fact, since 2009-10, the government (and indirectly the taxpayer) has spent over Rs 1.1 lakh crore to either directly make up the losses or raise loans to do so. 
• Present: 
  • As of August 2021, AI’s debt was Rs 61,562 crore. 
  • Moreover, every additional day that AI remains operational, the government suffers a loss of Rs 20 crore — or Rs 7,300 crore per year.

Why is the selling of Air India being considered a landmark? 

• The process was a labour of nine months for officers in the Union Finance Ministry who encountered multiple obstacles, and had to shed the “over-conservatism” that is typical of bureaucracy.
• This time the government had kept itself open in terms of what the bidding parameters would be, which is why there were so many changes to the conditions throughout the process.
• No one among the Opposition Congress and the Left — a traditional opponent of privatisation — has so far reacted unfavourably. 

The Terms of the Air India deal between Tata and GoI

• Tata group holding company, Tata Sons Pvt. Ltd, through its wholly owned unit Talace Pvt. Ltd, submitted a winning bid of ?18,000 crore as the enterprise value of Air India, against a reserve price of ?12,906 crore. 
• The group will also assume ?15,300 crore of Air India’s debt with the remaining ?46,262 crore taken over by the government’s Air India Asset Holding Ltd (AIAHL), a special company set up to hold half of the airline’s loans, four of its units and non-core assets. 
• Air India’s non-core assets comprising land and building, valued at ?14,718 crore, will be transferred to AIAHL.
• The Tata group will also have to pay ?2,700 crore in cash to the government.

Challenges in Privatisation of the Air India 

• There were two main hurdles:
  • The government retained a partial stake: 
    • As long as the government kept a certain shareholding of AI, private players did not seem interested. 
    • That’s because the mere idea of government ownership, even if it was as little as 24%, made private firms wonder if they would have the operational freedom needed to turn around such a heavy loss-making airline. 
    • Unlike all the past attempts, this time the government put 100% of its stake on sale.
  • Mountain of debt on AI’s books: 
    • Not to mention the ongoing losses. 
    • In the past, the government expected the bidders to pick up a certain amount of the debt along with the airline. That approach did not work. 
    • This time, the government let the bidders decide the amount of debt they wanted to pick up. 

Significance

• Clear Message to Investors:
  • The privatisation of Air India is a message from the Government to the markets and global investors that it has the political will to bite the reform bullet.
  • Its demonstrative effect gets amplified because Air India was always a hard sell given its colossal losses and debt despite continuous infusion of funds.
• Boost to Future Privatisation:
  • A transaction as “tough and complex” as Air India’s in an open, transparent and competitive bidding process, will boost future privatisation.
  • There will be a fillip because bidders will get more confidence in the government’s capacity to close transactions.
• In sync with Market Realities:
  • Several decisions such as a guarantee to the bad bank and willingness to convert its outstandings with private telecom companies into equity suggest the government is keen to push ahead in sync with market realities.
• Reduced Government Role in Economy: 
  • It underscores the PM’s commitment to reducing the government’s role in the economy. 

Issues with Disinvestment

• Loss of Regular Income: 
  • The Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. 
• Ignoring Reforms:
  • It has become just a resource raising exercise by the government. 
  • There is no emphasis on reforming PSUs.
• Culture of Inefficiency: 
  • The valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 percent. 
  • With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.
• Bureaucratic Control: 
  • The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. 
  • Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.
• Social Insecurity:
  • Disinvestment affects labour forces’ social security.
• Risk to National Security: 
  • Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. 
  • Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).
• Private Monopoly: 
  • Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits
• Funding Fiscal Deficit is Unhealthy:
  • Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. 
  • It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements. 

Conclusion

• Given the chequered track record Indian private airlines have, privatisation of Air India may not ensure its redemption. But that does not justify the government running a business or keeping a bleeding firm alive forever, causing huge losses to the exchequer. When the government has limited resources and state capacity, it must cautiously allocate both of them. Lack of such prioritisation may lead to cases like Air India.
•  In the last two decades, an avalanche of political economy and red-tape has often hijacked the attempts to privatise Air India. Perhaps this time, if the deal takes off, economic sanity would prevail.

Sources: IE + IE