One is the banker to every Indian, the other is the maharajah in the sky. So no prizes for guessing who will be the darling of the government when North Block tosses between bailout funds for the two.
At R6,600 crore for Air India and R8,000 crore for State Bank of India, it?s a piquant year when both have come before the government with a bowl. Both are public sector companies and a lot of their difficulties begin here. And then the storyline changes.
While it will be difficult for even a single Cabinet minister to write a sentence to justify why AI should be saved, there is obviously not an iota of doubt why SBI needs the support. Yet, as the government bean counters try to adjust the budget numbers, they are faced with a bit of an either-or choice. That?s because the choice itself has been projected wrongs by the government. The choice is not between SBI and AI; it?s between a one-time capital shot for SBI that will let India?s largest bank expand credit on a multiplier basis. Since Tier I capital by current norms should not be less than 9%, a R8,000 crore injection works to a credit expansion of R90,000 crore. The impact on the credit-starved power sector, for instance, will be felt across the board.
A R6,600 crore additional equity to AI on a debt overhang of R44,000 crore will simply reduce its gearing and make it more profligate in the future. The sum will send the company to the passengers to do more of the same things, i.e., sell tickets below competitors who do not have a subsidy to fall back on, do no restructuring since the pressure has been lifted and then appear before the finance and civil aviation ministries again next year with another round of demands. Both reports on AI by SBI Caps and Deloitte expect the government will have to continue with additional support for several years before the company comes near break-even point. Airline consumers may crib that when AI reduces prices, it benefits them, but they obviously do not factor the additional tax that each section of the society pays to keep the AI flyers feeling comfortable with low ticket prices.
The options, therefore, should be to disinvest, i.e., sell to a strategic buyer the ?airline and use the sum to finance SBI right now, so it can truly be on its way to handling global competition. Of course, for SBI, too, disinvestment works best, but not as a strategic sale. Instead, retaining government control by reducing its sharehholding to, say, 33% is a far better option. A caveat is, of course, that the larger the shareholding base of SBI, including investors abroad, the more they will beat down the share prices at any hint of government riding its will over the board.
Welfare theory says privatisation works best where the role of the government in lessening market failure is the weakest. Translated to the case of AI, this is very clear.
Despite Kingfisher making losses (which, in any case, should not be a concern for the government), the other airlines (there are 11 scheduled airlines in Indian skies?cargo and passenger) are able to pull along. Some, like Indigo are making operational profits too.
Since the market for civil aviation has maintained an annual 18% growth rate since 2003-04, there is no reason to believe a privatised AI will not be able to make room for itself in the skies, rather than living on dole. This means a closure of AI or its privatisation is the correct option to offer. Both options will lead to a lesser role for the government, and will prevent market failure. At a less cost to the economy, welfare for the society is maximised.
This should be the nub of the Cabinet note for Manmohan Singh?s team to ?take a correct decision on AI.
There is indeed no way the finances of AI can be revitalised under the present system. Profit-based competition is essential to keep any organisation in fine form. That, however, is not possible in a monopoly, least of all a public sector monopoly. AI is a monopoly, as about 30% of the seats in the airline are booked by government departments through a voucher system. The vouchers are priced at full cost as the airline seeks to maximise its earnings in the process.
No other airline gets such an explicit subsidy. They have to sweat their capital, mostly aircrafts and landing units, to extract profit. Over the past three years, the only thing that has risen for AI is its losses; from R5,500 crore in 2009-10 to R7,000 in 2010-11 and over R8,000 crore in 2011-12.
The culprit is the public sector system, where there are too many principals who dilute the principal-to-agent relationship, destroying the integrity of the operational command.
In this budget, the government will be creating a record: it will be providing support from its budget to the public sector lender and also for the borrower, almost in equal measure. A large part of the expected trouble for SBI is from the AI loan. It must have been a very wise set of policy measures that brought the economy to such a pass.
subhomoy.bhattacharjee@expressindia.com