Selling Air India should set off new wave of divestment

The divestment in Air India should have happened about two decades ago, but news of the impending divestment now is the signal required for other non-performing government assets. Air India, a wholly owned government airline, was Rs 52,000 crore in debt till June last year when the Union cabinet agreed on the proposal for its strategic divestment.

Founded in 1932 as Tata Airlines, Air India became a public enterprise in 1953. It has been almost a decade since the last time the government airline reported a profit. In the last few years, the central government has pumped Rs 23,993 crore to keep it flying. This accounts for some 80% of the amount that was supposed to be invested in the airline till 2020-21.

Pulling through the divestment of the national airline was a difficult policy move as it was strongly opposed by the parliamentary panel at the time. The panel later came around. However, over the years, some significant arguments have been raised against the divestment, mostly with regard to its impact on the 29,000 employees working for the airline and its subsidiaries and the efficiency of the rate at which the airline is being divested. That said, the economic health of the airline is such that it is increasingly becoming a burden on the government exchequer.

The divestment of Air India should be seen as a significant step towards ensuring a prudent and optimal involvement of government in the market. A product of the 1991 reforms, divestment was supposed to inculcate market discipline in public sector bodies. The process of divestment was formalised after the Disinvestment Commission was set up in 1996.

The goal of the commission was to examine and suggest government withdrawal from non-strategic sectors. Following up on the commission, a department of disinvestment was formed in December 1999, which became the Ministry of Disinvestment in September 2001. In May 2004, it was made one of the departments under the Ministry of Finance.

Over the years, the objective of divestment has moved from being a strategic tool for the government to just an instrument to reduce fiscal imbalance. This is evident from the focus increasingly being on the amount raised from divestment rather than the sectors or the firms being divested. For instance, in last year's Budget, Finance Minister Arun Jaitley announced that the government would raise Rs 72,500 crore through disinvestment in PSUs in 2017-18, which was higher than the Rs 45,500 crore raised in the previous fiscal year. In the wide coverage on the topic, the firms being divested were given limited importance.

The apathetic attitude of the Ministry of Finance towards divestment has removed any incentive for PSUs to remain efficient. More than increasing financial burden, aimless divestment has led to the government spending taxpayer money on uneconomical ventures like Air India. To achieve its aim of ensuring an efficient and smooth market, the government should focus on two primary objectives: one, to increase market competition; two, to regulate.

In order to increase competition, government needs to discontinue PSUs that provide goods and services like air travel, soaps, etc., which can be supplied efficiently by private players. Instead, PSUs should primarily focus on goods and services where private participation is not efficient or profitable, like natural resources and defence.

With respect to regulation, government bodies should focus on creating robust rules and improving market conditions. For instance, instead of pumping money into Air India, the Ministry of Finance and the Ministry of Civil Aviation could have focused on ensuring easy entry and exit for new players, increasing opportunities for airline industries to raise capital, and promoting a healthy market for them.

40 more to go

The investments in loss-making PSUs run deeper as more than 40 central public sector enterprises have not been economical in the last three years. Amongst these, the big names are telecommunications service provider BSNL, steel-maker SAIL, Hindustan Machine Tools and Indian Drugs and Pharmaceuticals Ltd. Besides being highly uneconomical, most of these PSUs are producing goods and services in which they have been thoroughly beaten by private players. This makes it futile for the government to spend taxpayer money to support these firms.

The prime example for this is BSNL, which has been one of the largest loss-making PSUs, with a cumulative loss of Rs 6,121 crore by FY 2016-17. HMT Limited, a state-owned company once popular for its wristwatches, had made a cumulative loss of Rs 1,256 crore as of March 2016. These examples reiterate the need to reduce the number of non-performing PSUs.        

One of the efficient ways for the Department of Disinvestment to reduce the number of non-performing PSUs would be to conduct regular evaluations of PSUs, based on their strategic and economic relevance. This would help the government to realign its investment towards firms with higher strategic and economic relevance. Keeping in mind the broader welfare goal of the government, strategic relevance is of higher significance than economic relevance. For instance, even if certain basic welfare services are loss-making, like providing electricity to rural areas, it is of higher strategic relevance for the government to ensure welfare rather than making profit.

It is in public interest that government resources are invested in the most efficient manner. To achieve this task, we need to revisit the PSUs in the country regularly and divest from uneconomical and non-strategic ventures like Air India. This would not only improve the fiscal health but it will also create incentives for PSUs to be at the top of their game.

(The writer is Policy Analyst, The Takshashila Institution)