The state has no business to be in business and that has been best amplified by Prime Minister Narendra Modi, for good reasons and more
The Modi government has allocated Rs 9,259 crore to Air India Assets Holding Limited (AIAHL), a government-owned special purpose vehicle set up to handle Air India’s (AI) debt and non-core assets, for the next financial year starting from 1 April 2022, as per the Union Budget 2022-23. The revised estimate of capital expenditure for the ongoing fiscal, FY22 (2021-22), is Rs 6.03 lakh crore. This includes an amount of Rs 51,971 crore towards the settlement of outstanding guaranteed liabilities of AI and its other sundry commitments.
In FY22, the Modi government infused equity of Rs 62,057 crore to clear AI’s dues before its disinvestment. Unlocking value through either quick resolution, monetisation, or via sale as in the case of the loss-making Air India, which went back to the Tatas in January 2022, the Modi government has exhibited excellent business sense. The Tatas, as part of the deal, had to pay Rs 18,000 crore to acquire Air India from the government. This follows the Group of Ministers (GoM) known as the Air India Specific Alternative Mechanism (AISAM) approving the bid winner after hectic parleys for months together. The long-awaited Air India divestment is one of the biggest reforms by the Modi government. The Air India privatisation is a glowing testimony to the political willpower of Prime Minister Narendra Modi in ensuring “Minimum Government, Maximum Governance”.
The Tata group holding company, through Talace Private Ltd, submitted the winning bid of Rs 18,000 crore as the enterprise value of Air India, against a reserve price of Rs 12,906 crore. The winning bid comprised a payment of Rs 2,700 crore and retaining a debt of Rs 15,300 crore. After the government received Rs 2,700 crore from Talace, a unit of Tata Sons, it transferred shares of Air India (100 percent of Air India and its low-fare subsidiary, Air India Express Ltd, and 50 percent stake in ground handling company, Air India SATS Airport Services Pvt Ltd) to Tata Sons. The Tatas beat Ajay Singh of SpiceJet to clinch the deal. The Tata group already holds a 51 percent stake in full-service airline Vistara, in which Singapore Airlines is the minority partner. It also owns a majority stake in AirAsia India Ltd.
Air India’s total debt stands at over Rs 61,562 crore, with over Rs 1.1 lakh crore having been spent on the airline since 2009. About 75 percent of the said debt is being transferred to a special purpose vehicle (SPV). Certain immovable assets held by the airline such as real estate, housing projects, etc, have been transferred to the SPV, Air India Asset Holding Ltd (AIAHL) and will be monetised to repay the airline’s outstanding debt. The airline’s art collection, which comprises over 4,000 works, however has been left out of both the disinvestment and asset monetisation processes.
What does the country get? Air India has been a loss-making entity since 2007, when it was merged with State-owned Indian Airlines, with successive Congress regimes milking it dry in the most embarrassing display of how a greedy nexus between politicians and bureaucrats sank the grand old flagship airline of India. Over the years, Air India accumulated losses rapidly, with a loss of Rs 20 crore per day, in one of the worst legacies of the erstwhile, corrupt, Congress regime, which is singularly responsible for sinking this airline with a series of damning economic policies, from the word go. The new owners are keen on turning around the finances of the loss-making carrier.
Air India’s accumulated losses rose to Rs 77,953 crore in 2020-21 (FY21) from Rs 70,820 crore in FY20. In FY21, the carrier’s net liabilities exceeded its assets by Rs 58,316.68 crore. Industry experts have said the Tatas will bring in experts with expertise in turning around loss-making carriers and will be bold enough to take tough decisions such as the dismantling of various unions. The country’s tax payers will be better off and the government will have the luxury of transferring a loss making asset to a corporate entity that has established credentials in the aviation sector, thereby leading to optimum utilisation of resources. The government will no longer be burdened by a strain on its resources from a thoughtless move 69 years back by India’s first prime minister.
What do Tatas get? According to aviation experts, the Tatas might have to spend at least $2 million on each aircraft in the fleet only on refurbishments, apart from added costs on pending maintenance checks. The fleet also needs to be modernised. As things stand, Air India’s aircraft lease contracts are very high, while the Boeing 777 are not very efficient and the Airbus A321 do not offer the same range and capabilities as the new models. (As of 2017, it had a fleet of 121 aircraft (excluding 4 B747-400s) comprising Airbus and Boeing aircraft such as the A319s, A320s, A321s, B777s and B787s). Don’t forget that Air India is one of the most extensive flight service providers in India, flying to 98 destinations (56 domestic destinations with around 2712 departures per week and 42 international destinations with around 450 departures per week) as of 1 November 2019. The Air India acquisition will give the Tata group access to 4,400 domestic and 1,800 international airport slots at Indian airports and 900 slots at foreign airports, including London’s Heathrow and New York’s John F Kennedy International Airport.
How does the Tatas benefit from the acquisition? Air India comes with global brand recall, assets, hangars and bilateral rights to fly to many countries. It has slots and parking bases at key airports, trained pilots and staff, which provide a ready product to serve the international market. With Air India and Vistara, the Tata group can now pose a threat to international long-haul aspirations of the likes of IndiGo or the international cargo plans of SpiceJet.
The acquisition helps the group leapfrog in the domestic aviation space, ahead of most of its competitors with a market share of 27-35 percent, just behind market leader IndiGo (52-58 percent market share).
What do the employees get? Better HR practices is what the Tata group will bring to the table to introduce efficiency in terms of overall service standards. None of the 12,085 odd employees will be retrenched for the next one year. Employees will be eligible for VRS from the second year onwards with all benefits. They can stay in company colonies for six months after the takeover. Employees will continue to get statutory benefits like PF, gratuity, etc. Tata group will continue to provide benefits to employees. About 50,000 retired employees will continue to get medical benefits under CGHS and NHIS.
Will it remain the official national carrier? By definition, a national carrier is an airline operated by, or on behalf of the government. Since Air India is no longer operated by the government of India anymore, it is by definition no longer the national carrier.
What happens to Vistara and Air Asia? The Tata group holds a majority interest in Air Asia India and Vistara, a joint venture with Singapore Airlines. Air India is the conglomerate’s third acquisition in the aviation sector. Aviation experts believe that the Tata group will eventually merge its low-budget airlines, Air India Express and Air Asia India. They will, however, have to take Singapore Airlines onboard, before drawing up any plans to synergise the operations of Air India and Vistara.
It has taken a tall leader of Prime Minister Narendra Modi’s stature to undo the damage done by Jawaharlal Nehru’s decrepit socialism 69 years ago. Under the Air Corporations Act, 1953, Nehru nationalised nine airlines, namely Air India, Air Services of India, Airways (India), Bharat Airways, Deccan Airways, Himalayan Aviation, Indian National Airways, Kalinga Airlines, and Air India International. These were thereafter brought under the ambit of two PSEs, Indian Airlines and Air India International. The unpalatable but hard truth is not merely the fact that airlines were brought under government control but more importantly, running of airlines by private businesses was made illegal and a criminal offence, with punishments ranging from a fine of Rs 1,000 to imprisonment for three months under Section 18(2).
Prime Minister Modi, in his speech in Parliament last year, outlined why it was not tenable to have bureaucrats run enterprises of all kinds. During the run-up to the 2014 election too, he repeatedly emphasised that the government has no business to be in business. And while the pace of disinvestment and privatisation has been the subject of much debate, there seems to be a clear policy push based on this worldview. The pandemic has also provided the government a reason, and an opportunity, to push ahead with larger second-generation structural reforms.
The Modi government, which came to power in mid-2014 with a massive mandate, took a comprehensive policy for disinvestment by rechristening the administrative arm as the Department of Investment and Public Asset Management (DIPAM). In his Budget speech on 29 February 2016, Finance Minister Arun Jaitley said, “We will adopt a comprehensive approach for efficient management of government investment in CPSEs by addressing issues such as capital restructuring, dividend, bonus shares, etc. The Department of Disinvestment is being renamed as the ‘Department of Investment and Public Asset Management (DIPAM)’.”
The department formally started functioning from 14 April that year. Jaitley also laid the basic contours of the government’s disinvestment policy. It was no longer limited to strategic sale or dilution of the government’s minority stake in the company. It also included monetisation of assets owned by CPSEs. “We have to leverage the assets of CPSEs for generation of resources for investment in new projects. We will encourage CPSEs to divest individual assets like land, manufacturing units, etc. to release their asset value for making investment in new projects,” Jaitley said on 29 February 2016.
There was another structural change, the NITI Aayog took the place of erstwhile Disinvestment Commission, in identifying the CPSEs for strategic sale. Besides, the disinvestment targets became increasingly ambitious and achievable too. The Budget target for 2020-21 was Rs 2.10 lakh crore, but it was revised to Rs 32,000 crore mainly due to adverse market conditions because of the COVID-19 pandemic. Finance Minister Nirmala Sitharaman, on 1 February 2021, announced an elaborate roadmap for disinvestment in the coming fiscal year.
“In spite of COVID-19, we have kept working towards strategic disinvestment. A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited among others would be completed in 2021-22,” she said in her Budget speech that year. She said, besides IDBI Bank, the government would take up the privatisation of two public sector banks and one general insurance company in 2021-22. Sitharaman announced a clear roadmap for disinvestment of all non-strategic and strategic firms.
“We have kept four areas that are strategic where bare minimum CPSEs will be maintained and rest privatised. In the remaining sectors all CPSEs will be privatised,” she said. To cut to the chase, barring the Covid years, the Modi government’s achievement of disinvestment-related targets has been always on track and that in turn ensured that the fiscal deficit was largely under 4.5 per cent during Prime Minister Modi’s first term in office, which is again great news.
Coming back to the Congress, Indira Gandhi followed Nehru’s wrong footsteps. With effect from July 1969, she nationalised 14 banks through the Banking Companies (Acquisition and Transfer of Undertakings) Act. The law to that effect was enacted in March 1970. The so-called reasons for this nationalisation were to provide accelerated credit to agriculture, encourage small industry and boost exports. Unfortunately, none of these objectives were realised. Despite this policy disaster, Indira Gandhi followed it up with another round of bank nationalisation in 1980, leading to the nationalisation of six more banks. Indira Gandhi also nationalised general insurance in 1972, via the General Insurance Business (Nationalisation) Act, 1972. She also nationalised coal mines and Coal India Limited (CIL) in 1973. Again, it is the Modi government that denationalised CIL last year, to incentivise productivity and disincentive inefficiency.
Air India has come full circle, back into the arms of its founders, the Tatas. A bold and brave move by the Modi government and if done right, the deal could in the long run prove to be bountiful for the new owners too. Air India was founded by industrialist and aviator JRD Tata in 1932 as Tata Airlines. In 1953 when the then Nehru government nationalised Air India, JRD fought valiantly against it. However, Nehru went ahead and decided to nationalise it, despite the fact that Air India was a profit-making airline in 1953. Worse, Nehru summarily merged a profit-making Air India with a bunch of other loss-making airlines, forming a large and clumsy state corporation that was destined to fail, right from the start.
Almost seven decades after it was nationalised, with Air India now going back to the Tatas, PM Modi has showcased why he is both a staunch welfarist and a straight talking, outstanding reformist, blending the two roles seamlessly. So is the Modi government selling family silver? No! Is the Modi government extracting the best possible usage of taxpayer funds by getting out of unproductive and loss-making businesses? Yes! Suffice to say that while the immediate aim of the partial disinvestment of the government’s stake in PSUs to institutional investors has primarily been to raise non-inflationary resources, the long-term purpose of disinvestment is to bring in efficiency, accountability and professionalism in these state-run enterprises.
Indeed, the state has no business being in business and that has been best amplified by PM Modi, for good reasons and more.
The author is an economist, national spokesperson of the BJP and the bestselling author of ‘The Modi Gambit’. Views expressed are personal.