Taxpayers? money used to bail out Air India could have been used for education and healthcare

The Air India bailout decision by the government comes as a major disappointment. In addition to the bailout package of R30,000 crore over 9 years, the consortium of banks has been asked to convert R11,000 crore of short-term working capital loans into long-term debt to save the beleaguered airline R1,000 crore in interest. Air India has also been allowed to issue non-convertible debentures of R7,400 crore, which, too, may have to be subscribed by the government-owned financial institutions. These are in addition to a R6,750 crore working capital loan and a R3,200 crore equity infusion that have already been done. The government has also allowed low-cost ECB for each airline up to $300 million.

The government, while approving the bailout package, has drawn up a restructuring plan, which includes the formation of two subsidiaries?one on transport services and another on maintenance, repair and overhaul. The government will infuse an additional R768 crore by way of equity to the two subsidiaries and transfer 19,000 employees, leaving the parent company with 11,000 employees to reduce the number of employees per airplane from the current 300 to 160. What happens if the employees do not accept this or accept it on the condition that they continue to get the same benefits they have been receiving from Air India? There is a proposal to offer a golden handshake to 7,000 employees, which, if successful, may actually see the exit of more productive workforce confident of getting re-employment and one can imagine what will happen to the service standards of Air India.

What social objective is this bailout plan supposed to achieve? Surely running an airline industry does not qualify as a matter under market failure because there is clear evidence that the private sector can run the industry better. This does not qualify as a redistributive measure because no poor person is going to be made better off by it. In a recent interview, the minister for civil aviation mentioned that running Air India is necessary to fly to places like the Northeast. This is really a hollow argument, for there are several ways to enable private airlines to fly to unviable routes at reasonable prices. The taxpayers? money used to bailout Air India could have been used for enhancing outlays on education and healthcare.

Given that there is no economic rationale, it is difficult to explain why the government is intent on draping the Maharaja with borrowed clothes. The answer lies in understanding who the beneficiaries from the bailout are. Of course, the employees would like the taxpayer to bear the burden because they consider that it is their fundamental right to do so. Doesn?t establishing a socialistic pattern of society imply unbridled protection to labour without any accountability? Any attempt to privatise will be thwarted by all means, fair and foul, because the airline is of the employees, by the employees and for the employees! Not surprisingly, the employees never saw that their main job as serving the customers, but to look after themselves. Now that there is a bailout, they can have a comfortable rein for a few more years until the airline reaches another crisis situation.

The most influential group that gains from the bailout is the bureaucrats and politicians. In fact, employees can breathe free and secure and continue with their non-responsive, non-accountable and poor quality of service because their fortunes do not lie in being competitive in providing the service, but in pleasing those who matter in the government. They can continue to carry their ?companions? in elite classes even when the regular customers do not find vacancy. It is only Air India that provides a companion-free travel across the world and babus and politicians on ?official duty? can travel free with their spouses in elite classes. Of course, Air India charges full IATA published fares for companion free travel, but that is borne by the taxpayer in the name of government expenditure. How can we privatise Air India when it provides such a useful service?

Unfortunately, there is no economic rationality in the government?s decision to bail out Air India and the only reason for the bailout seems to be the ability of the special interest groups to force this decision. Of course, the government has to claim that there will be restructuring to make the airline profitable. As mentioned earlier, the creation of two subsidiaries is no guarantee for turning around the fortunes of Air India. The airline has been given the ?milestones? to achieve and these include achieving a load factor of 75% and on-time performance between 85% and 90%. Anyone who has travelled in Air India knows how hollow these are. The question is, what the incentives to achieve these targets are and what accountability system is in place when they fail to achieve them?

Bailing out Air India is surely not a viable idea and there are no sound economic arguments to continue it in the government sector. The bailout will only keep it flying at taxpayers? expense.

Even as the finance minister wants to compress subsidies to 2% of GDP from the prevailing 2.5% because they adversely impact macro fundamentals, such hidden subsidies will continue unabated. He does not know what the volume of such hidden subsidies are, which have to be paid for from the budget either directly or by way of recapitalising banks and financial institutions. The taxpayer also has to face the burden of protectionism given to the national carrier as the government employees are required to travel not by the cheapest and most convenient carrier, but by the national carrier, which costs much more to the exchequer.

The government must realise that the only way to salvage Air India is to sell it and use the taxpayers? money for providing much-needed social services and physical infrastructure. Indeed, given that Air India still has some high-value real estate and profitable routes, many of which have been making losses, it is possible to attract suitors. The government must work out plans to privatise the company even if the decision has been taken to bail it out this time. Half-way houses will only cause more misery for the passengers and the taxpayers.

The author is director, NIPFP. These are his personal views