Context:
Recently, NITI Aayog has recommended strategic disinvestment of Air India. Subsequently Union finance minister stated that it will now explore all options for the same.
What are the arguments in favor of its privatization?
a) Huge debt: It is operationally inefficient, has been grossly mismanaged and is unable to compete with private sector operators. Due to this it is consistently making losses and is dependent on the government for survival. It has a debt of close to Rs 50,000 crore.
b) Overstating profit: Analysts strongly believe that the Air India is overstating its operational profit as due to its poor service it has been losing market share. The Comptroller and Auditor General of India (CAG) questioned its operational profit of Rs 105 crore for 2015-16.
c) Failure of 2012 bailout package: The 2012 turnaround plan (in which the airline was provided with a bailout package of Rs 30,000 crore) has not shown the desired results. Air India has failed to meet the operational targets as well as target of raising Rs500 crore annually through monetization of assets in the four-year period from 2012-13 to 2015-16 (the company managed to raise only Rs64.06 crore).
d) Wastage of tax payers money:
i.If the status quo exists then the government will have to keep bailing out Air India leading to wastage of tax payers money.
ii.It will also affect the fiscal health of the government.
iii.Also this amount can be used in other important areas such as health and education.
e) Against the principles of market economy:
i.Going by the established norms of market economy, the government should not be providing goods and services where the private sector has a vibrant presence.
ii.Presence of state-owned companies having access to government finances and practically no fear of failing affects price discovery in the market and can hurt private sector operators in the business.
f) Will give a push to pending reforms:
i.This will send a strong signal to investors that India is serious about reforms.
ii.This will also set an example and pave the way for disinvestment of other loss-making companies, such as Mahanagar Telephone Nigam Ltd (MTNL) and Bharat Sanchar Nigam Ltd (BSNL) which cant compete in India’s hyper-competitive telecom market.
What are the challenges in its privatization?
It will not be easy for the government to privatize Air India.
a) The NITI Aayog has said that all non-aircraft related debt should be written off to make it attractive for investors. But it will be difficult to convince banks, financial institutions, oil companies and the Airports Authority of India to agree to such a massive write-off.
b) Secondly, there is problem of employees. The Air Corporation Employees’ Union has warned the government of a “major confrontation” if it decides to go ahead with this disinvestment.
What should be the way ahead for the government
a) Government should sit with professionals to find ways to make the deal attractive for a prospective buyer.
b) For this, government should reduce the level of debt in the company. This can be done in various ways
i.Government can sell its non-core assets. Airline owns prime real estate valued at over Rs 4,000 crore. For example the Hotel Corporation of India— one of its subsidiaries, which runs hotels — can be sold to reduce debt.
ii.Government should try convincing the financial institutions to convert a part of the debt into equity.
iii.The government can even infuse equity capital one last time in Air India.