Air India: Government has no business to be in business

On the back of the Air India sale, government/s would do well to sell all other businesses. They have more important things to do

Several decades ago, a young, talented, wealthy prince on the cusp of greatness, nurtured with passion, discipline and hard work, was abruptly, and for no apparent reason, seized by the State. After 68 long years, the return of the Maharajah to his original home – but now emaciated, impoverished, and a shadow of his former self — is bittersweet! Little wonder, that Ratan Tata said “Welcome back, Air India”, but added ruefully, “It will take considerable effort to rebuild Air India”.

While it is an emotional and historic moment, it must serve as an allegorical tale; one that tells us, from an economic perspective, of a past imperfect and a future tense. It is symptomatic of a problem that stares us in the face, the solution to which has eluded us over the past 75 years.

When Air India was nationalised in 1953, it set the country on a path that has been difficult to return, or even turn, from. It put economic India in a state of mind, and grew a State apparatus doing business, that smothered innovation and excellence; and in its place spawned a culture of inefficiency and corruption.

While the precipitous decline of the Maharajah was sad, the price that India has paid since is the greater tragedy. There can be little doubt that the nationalisation of Air India was a pivotal event in India’s economic history, and formed the basis for what was to follow — the nationalisation of banking, insurance, and several other drivers of growth. It is now a collective state of mind that we are yet to recover from. What we lost as a nation and a people was epitomised by JRD Tata in his letter to the Air India staff on the eve of its nationalisation: “The time has come to say goodbye...What we did was worth doing. We set our standards high and would not lower them.” That spirit is what we lost, and ever since in our national work culture, with few exceptions, we have embraced mediocrity, unable to foster excellence. Why might this be the case?

Even a passing acquaintance with independent India’s economic history points to the one economic question that successive governments have failed to resolve — to strike the right balance between the State and the market to meet our development needs. Regardless of political ideologies, all governments since Independence have systematically disregarded the prevalence and the cost of ‘government failure’. This is more by design than by default, because the public sector serves as the handmaiden of politics. The State has, in the past 75 years, often intervened arbitrarily without evidence of ‘market failure’. This is true as much of the states as the Centre. Interventions for redistributive justice, on the other hand, while a desirable end, have often been inept and inefficient, using price controls that distort resource allocation and relative prices, and rendering the administrative delivery mechanisms costly and corrupt — the food procurement and public distribution system is evidence enough.

Also read: Sale of Air India: It had to be done

The command-and-control strategy that we continue to wade through has accorded a dominant role for the public sector, little recognising that reconciling managerial independence and public accountability is an intractable problem. This is primarily because of the ‘agency’ problem best described as the moral hazard — when a public entity has an incentive to increase its exposure to risk, because it does not bear the full costs of that risk (after all, there is a ready bailout package in case of failure), it is the citizens that pay. While Tata Sons wresting back control of Air India is cause for celebration, we must recognise that for the government, it was more a compulsion than a choice. The response to the central question concerning the choice between the State and the market in organising economic activity remains ad hoc, unclear, and less than strategic. The time is right to settle this ideological dilemma.

The underlying principles to strike the right balance must begin with Adam Smith’s abiding first principle of the ‘invisible hand’. Competition is the engine of a productive society, and that self-interest will eventually come to enrich the whole community, as if by an invisible hand. It is, therefore, best to leave to the market the business of flying planes, running trains, operating hotels and manufacturing soap, as an illustrative list if you will. On the back of the Air India sale, government/s would do well to sell all other businesses simply because others can run them better and governments have far more important things to do.

Second, neglect of the social sector has been a direct result of the preoccupation of governments with running businesses. In particular, poor progress on health, education and gender equality has been a human development constraint to rapid economic growth, besides putting us on the path of non-inclusiveness. Government/s ought to focus on the provision of ‘public goods’, the efficient provision of which by their very nature would benefit all — maintenance of law and order, administration of justice, water and sanitation, primary health care, primary education, and skill development — and do that well.

Finally, in the backdrop of the impending climate change challenge, another important area of market failure and hence a role for the government is to act decisively to prevent the ‘tragedy of the commons’; to regulate the unfettered market exploitation resulting in overuse or even exhaustion of scarce common resources.

If there is one lesson from the Air India saga, it is that government/s must make the distinction between the public sector producing goods and services, and the State paying for goods and services. The return of the Maharajah must serve to break the dogma of the public sector. Government/s must eschew, to paraphrase J R R Tolkien, “One Ring to rule them all, One Ring to find them all, One Ring to bring them all, and in the darkness bind them.”

This will be a fitting tribute to the excellence that India is capable of.

(The writer is Director, Public Affairs Centre, Bengaluru)

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