Government may be third time lucky to say ‘Tata’ to Air India

Privatisation may not ensure redemption for the loss-making airline, but it still is high time the government gets this done

Sudipto Banerjee October 06, 2021 19:13:53 IST
Government may be third time lucky to say ‘Tata’ to Air India

An Air India aircraft.

The much-delayed privatisation of Air India has suffered from several false take offs. Since the interim Budget of 1991-92, India has followed a policy of disinvestment with regards to Central Public Sector Undertakings (CPSUs). The term ‘privatisation’ was first used in the Disinvestment Policy (1999-2000) formulated by the Atal Bihari Vajpayee government. While disinvestment need not result in change in state ownership, privatisation implies government relinquishing its stakes completely. Over the last three decades, only 10 CPSEs have been privatised.

There is a list of failed attempts to privatise; and Air India is one of them. Twenty years ago during the Vajpayee government, when the first attempt to privatise the national carrier failed, Arun Shourie, the then minister of disinvestment, clarified in Parliament that stiff opposition and slowdown in the international airline businesses were the prime reasons for the deal to fall apart.

Interestingly, Air India’s privatisation seems to be inching towards finalisation at a time when the global aviation sector is in the throes of a crisis. If the current speculation that the Tatas might grab the deal comes true, Air India would revert to its original owners in a strange reversal of history. Even otherwise, if the deal goes through, it would have three important significances. First, it would mark the revival of privatisation in India. Second, this would be the Modi government’s first successful strategic disinvestment deal in the last seven years, when disinvestment has been merely confined to sale of some PSU shares to another PSU. Third, recommendation of the Disinvestment Commission (given in 1998) to privatise Air India would be finally implemented.

Background

In the 1950s, when India started experiments in socialism under Jawaharlal Nehru, one of the targets of the nationalisation drive was the airways owned by JRD Tata. In 1953, the Air Corporations Act was enacted which nationalised the airline industry and created two corporate bodies: Indian Airlines (for domestic routes) and Air India International (for foreign routes). While the government became the owner, JRD Tata continued as the chairperson. Given the limited experience of the government in running an airline, the private sector was engaged in an operational role. However, this was opposed as privatisation of the management.

When an impending economic crisis compelled India to embrace liberalisation in 1991, Parliament passed the Air Corporations (Transfer of Undertaking and Repeal) Act, 1994 which allowed private players to operate the passenger airlines segment. With increasing competition and bureaucracy, the public sector airlines steadily lost market share between 1991 and 1993. Over the next few years, the airlines faced losses (approximately Rs 300 crore annually), old aircraft, high maintenance costs and employee to aircraft ratio. In 1998, for the first time, the Disinvestment Commission recommended privatisation of Air India. The commission recommended the government to infuse equity of Rs 1,000 crore and bring down its shareholding to 40 percent. But it was not implemented.

First attempt: NDA government

Often recalled as the privatisation era, the Vajpayee-led government decided in May 2000 to pursue strategic sale of Air India with a cap of 26 per cent on foreign shareholding. While four parties expressed their interests, the bid carried a stipulation for foreign bidders to have a JV with an Indian company. As a result, two out of three bidders failed to meet the criteria. Not surprisingly, the attempt triggered a political furore, including from the members of the ruling coalition and the civil aviation minister himself. More controversy surfaced when the managing director (MP Mascarenhas), who supported the deal, was suspended for alleged corruption. Faced with stiff opposition and public outcry, even the Indian bidders, i.e., Tata-Singapore Airlines consortium and the Hinduja group, exited from the process. The first attempt to privatise Air India ended in failure.

Merger and restructuring: UPA I and II

With the defeat of the NDA government, all attempts to privatise PSUs came to a grinding halt. During 10 years of UPA I and UPA II not a single firm was privatised. However, in 2007, the UPA government decided to merge Air India and Indian Airlines into one entity—National Aviation Co. of India Limited with the hope that combined financials and expertise could redeem the firms. On the contrary, several HR and operational issues surfaced which contributed to more losses. So much so that a separate committee headed by Justice Dharmadhikari was set up to resolve the HR issues. In 2011, the CAG called the merger ill-timed and ill-prepared. Despite the challenges, measures were taken to revive the airline. For instance, in 2012 a turnaround plan was approved which required equity infusion of Rs 30,231 crore over a period of 10 years. Till the end of FY 2017, the government had already released Rs 26,545 crore, however, the total loans of Air India stood at Rs 48,477 crore.

Attempt to revive privatisation: Modi I and II

When the Narendra Modi government came to power, a popular speculation was that it would revive the legacy of the Vajpayee-led privatisation era. One of the firms on the block was Air India. In May 2017, NITI Aayog proposed Air India and its five subsidiaries for strategic sale. Soon Cabinet approval was granted which led to the constitution of a special body, the Air India Specific Alternative Mechanism, to hive-off the surplus assets to a shell company before privatisation.

In March 2018, after a lull of almost two decades, the second attempt was made to privatise Air India. Not a single bidder showed up to buy the debt-laden company. Faced with embarrassment, the government was quick to respond to the market sentiments. Substantial changes were made to sweeten the deal. For example, transfer of half of the losses to a newly created SPV, namely, Air India Assets Holding Ltd, change in valuation norms to freeze the debt at Rs 23,286.5 crore, offer of 100 percent equity (earlier offer was 76 percent), promise to indemnify buyer against contingent liabilities, and payment of certain contentious employee dues before closure of the transaction.

With such massive changes in place, a confident third announcement was made in January 2020. But the outbreak of the pandemic wiped out the entire year. After multiple extensions, the deal spilled over to the next fiscal year (2021-22). In the meantime, Cairns had sued Air India (as an agent of the Indian government) to enforce an arbitral award in a separate tax dispute against India. It was only after the government’s assurance to settle the claims that Cairns obtained a stay on the proceedings.

Going forward

Given the chequered track record Indian private airlines have, privatisation of Air India may not ensure its redemption. But that does not justify the government running a business or keeping a bleeding firm alive forever, causing huge losses to the exchequer. When the government has limited resources and state capacity, it must cautiously allocate both of them. Lack of such prioritisation may lead to cases like Air India. In the last two decades, an avalanche of political economy and red-tape has often hijacked the attempts to privatise Air India. Perhaps this time, if the deal takes off, economic sanity would prevail.

The writer is a public policy consultant at NCAER, a Delhi-based think tank. Views expressed are personal.

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