Privatize Air India

By Raymond E. Vickery, Jr —

Source: dustin.hackert’s flickr photostream, used under a creative commons license.

Status: Not Started, On Agenda Prime Minister Narendra Modi came to power in 2014, vowing a robust disinvestment and outright privatization program for government-owned public sector undertakings (PSUs). The flagship for this effort was to be Air India (AI). Despite multiple attempts, AI remains 100 percent owned by the government. After the landslide victory in 2019, the government has once again put on the agenda the immediate, total privatization of AI.

High Difficulty: Commercial and Political Opposition The major impediment to sale has been finding a buyer willing to purchase AI under terms and conditions that are acceptable to the government. Political opposition comes from the political and bureaucratic class which risks losing the benefits of having a national carrier. AI trade unions oppose as well.

This is the fourteenth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

AI has a long and storied history. Founded in 1932 as the privately-owned Tata Airlines, it was nationalized in 1953 and divided into two parts – AI for international flights and Indian Airlines for domestic operations.  In 2005, the two parts were reunited under the name Air India. With few exceptions, AI has failed to pay its way over the past 15 years. For political reasons, the airline has been saddled with uneconomic practices, including a bloated workforce and loss-making routes. Indian politicians routinely receive special treatment by the national flag carrier. These politicians are reluctant to forego their VIP perks. The government has pumped substantial funds into AI to keep it in operation. The result has been a crippling level of debt that now totals nearly  $8 billion..

The Modi government’s first attempt at selling off an ownership interest in AI foundered on restrictions as to whom the stake could be sold and the degree of control that might go with such a stake, as well as commercial considerations about debt. The government thought it had addressed these issues when it offered to sell 76 percent of the airline in the first few months of 2019. However, buyers were still wary of control and debt issues. No bidders came forward. This time around the government is authorizing an offer of 100 percent ownership, hiving off more than half the AI debt, and showing further flexibility on which assets a buyer can take and maintain.

The government says it wants to find a buyer in the last quarter of this fiscal year (March 31, 2020) and close the sale shortly thereafter. However, the loosened terms and conditions and accelerated time table are once again engendering political opposition. A major source of opposition comes from the trade unions that represent AI workers concerned about widespread layoffs. These unions argue that forgiveness of debt would once again make the airline economically viable.

Indian nationalists are concerned that the prestige of the country would be diminished by the national flag carrier’s sale, particularly if the sale involves foreign interests. Politicians on the left continue to decry selling off the “crown jewels” of the Indian economy. The possible diminution of political and bureaucratic officials’ air travel perks is also playing a role.

Modi government forces advocating privatization have fought back with leaks to the press pointing out that AI continues to hemorrhage cash, and implying that AI will have to be shut down by mid- 2020 if no buyer can be found.

The Modi government is committed to lessening the role of state-owned enterprises in India. This commitment is both for ideological and fiscal reasons. Moving India away from government ownership and control has always been a strand of the Modi economic philosophy. In addition, a slowing economy and increased fiscal commitments, particularly to rural voters, mean the Modi administration needs to raise cash and cut losses from inefficient PSUs. AI has long been a flagship for the privatization/disinvestment effort. If AI remains a government-owned burden, Modi’s whole privatization effort will be jeopardized.

Mr. Raymond E. Vickery, Jr is a former U.S. assistant secretary of Commerce and Senior Associate (non-resident) with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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