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Privatize Air India, now

LiveMint logoLiveMint 28-05-2017 Pravin Krishna

Recently, Union civil aviation minister Ashok Gajapathi Raju indicated that the government is looking at all options for the ailing national carrier, Air India, including possible disinvestment. Adding to this, minister of state for civil aviation Jayant Sinha asserted that the government has a “winning” strategy for Air India, also confirming that disinvestment was a possible, but by no means certain, option.

We will argue that privatization is the best possible solution to the conundrum that Air India poses. You do not need to have a doctorate in economics or be an investment banker to realize that if Air India had accumulated debt of more than Rs50,000 crore as of the end of the 2015-16 fiscal year, something is rotten in the state-owned airline.

In fact, the only qualification required to realize that Air India is ripe for disinvestment is to have flown it in recent months or years. Flights are routinely delayed, the equipment is old and mouldering, and the prospect of good service depends upon the whims of the flight attendant who happens to be assigned to you. The airline has come to be seen, with ample justification, as a platform through which politicians and officials enjoy the perks of office, at everyone else’s expense.

A privatized Air India could not possibly be worse, and likely will be much better. And, most importantly, it will cease to be a drain on the exchequer.

It helps to start from first principles. The theory of economic policy, as it has developed in the post-war period, establishes that government intervention in the economy is warranted only in the event of market failure or of an overarching non-economic objective.

Going beyond conventional tools of intervention, such as regulation, taxes and subsidies, nationalization and monopolization of an industry—such as when Air India and the erstwhile Indian Airlines had government-granted monopolies on international and domestic flights, respectively—only makes sense in the rarest of cases, those situations in which the private market cannot deliver the good or service in question, such as a case of catastrophic market failure.

Thus, most economists would agree that governments ought to monopolize the provision of national and internal security, and many, although not all, would agree that public provision—or, at any rate, public funding—of health and education makes good sense.

But no sensible economist would make the case that there exists a market failure so catastrophic that the government should ever be in the airline business. If the rationale is to support flights to commercially unviable areas, subsidies, not nationalization, is the way to go.

Even more anomalous, since private carriers have been allowed to enter the industry, we now have the familiar spectacle of a government-owned airline competing with private airlines and not doing a good job of it. The fact that Air India’s domestic market share plummeted to about 13% as of March 2017 tells its own tale: Most people would rather not fly Air India. Those who do not have a choice—government officials, those with contracts with the government, and so forth—have to grin and bear it.

So what is to be done? We propose that rather than attempting a palliative, which is to pour more money into an already failing nationalized airline, the best way to turn Air India into a great global airline, an aspiration articulated by Sinha, would be to cut it loose from the clutches of the government, either by fully privatizing the airline or reducing the government’s stake to a minority interest.

We would not be pioneers in pursuing such an approach to turning around a demoralized, loss-making enterprise.

Following the privatization of British Airways, widely seen as being among the most challenging of the Margaret Thatcher-era privatizations in the UK, the airline rose, in a few short years, to become the world’s “favourite airline”. Indeed, the experience of other countries in successfully privatizing their national carriers, from Kenya (Kenya Airways) to Canada (Air Canada) to Singapore (Singapore Airlines) should prove instructive in designing our own approach.

Be that as it may, privatization of Air India is a must, if the Bharatiya Janata Party (BJP)-led government of Prime Minister Narendra Modi is to cement its deserved reputation as a government of economic reform. Indeed, the only legitimate criticism that naysayers might have had is that the pace of disinvestment has been slower than might have been wished for.

Disinvestment of Air India would send absolutely the right message, that India is now a market economy, not a planned economy in which the government clings on to the “commanding heights”, and that the Modi government is serious about extending the disinvestment agenda to other potentially politically sensitive areas.

“The government has no business being in business,” Prime Minister Modi has averred on numerous occasions, and he is right. There is no better way to demonstrate that this is no mere slogan, but a principle of sound governance, than for the government he leads to commit to an explicit road map for the privatization of Air India. If that happens, we will know that the old era of central planning is, just maybe, genuinely behind us after all.

Pravin Krishna and Vivek Dehejia are, respectively, Chung Ju Yung distinguished professor of international economics at Johns Hopkins University and resident senior fellow at the IDFC Institute.-

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