Modi government must absorb all Air India debt

Now that the Air India sale process has come a cropper, and the government is reportedly looking at listing Air India (AI) in order to make it a truly independent company, the obvious question is who will buy it? As per the plan, once the government stake in Air India falls to below 50%, an independent board and a brand-new team can be appointed to fly the airline into profitability—once the stake is below 50%, the PSU is outside the purview of CBI/CVC/CAG as well as rules such as on compulsory tendering, and this makes operations smoother.

There are, of course, several problems with this idyllic picture. For one, how do you ensure the government does not interfere in Air India’s running even if its stake is, say, 48%? The government, it is true, is not interfering with the running of Axis Bank where it has a significant stake, but it is in the case of UTI where it has an indirect stake of 74% via public sector financial institutions. But, even if you assume that the government genuinely stops interfering, or it sells all Air India’s shareholding to the public, why would financial investors buy the airline? Getting an LIC or an EPFO to buy large chunks of Air India’s equity is always an option, but, that is hardly desirable since it risks the retirement savings of crores of Indians.

What makes a lot of sense, however, is for the government to absorb all of Air India’s debt since the airline will then be profitable, even if barely (see table). From a profit before tax (PBT) loss of Rs 3,780 crore in FY16 and Rs 4,067 crore in FY17, it will swing to a PBT of Rs 692 crore and Rs 168 crore, respectively, if all the debt is absorbed by the government instead of the plan to transfer Rs 25,000 crore of its long-term debt to the potential buyer. Theoretically, this will make Air India’s listing more attractive, but, since turning around the airline will take a lot more, it is a better idea to try to sell it to an airline company that has the ability to affect the necessary management turnaround—that is, tell all buyers that Air India will be debt-free and try to restart the privatisation process.Should the government absorb all of Air India’s debt, of course, it will be labelled a suit-boot-ki-sarkaar all over again, writing off Rs 25,000 crore to help, Congress president Rahul Gandhi will allege, prime minister Narendra Modi’s rich friends.It is, however, important to keep in mind that the government will still be a winner should it do this since the airline’s losses are only going to mount. They have averaged around Rs 5,400 crore per year between 2012-13 and 2016-17, but are likely to be around Rs 7,000-8,000 crore in FY19 if oil remains at today’s levels. In other words, the amount of debt the government writes off will equal just three to four years of losses should it continue to run the airline. In the kind of acrimonious politics that India is witnessing today, it is unlikely any Opposition leader—including those in the BJP, if it were not in power—will accept such logic; but that does not take away from the fact that, if the airline is not sold off, the taxpaying public will continue to bleed badly for the sake of 11,000 permanent employees. Indeed, India’s tragedy is that no one, not the Union government, not the Opposition, nor the tax-paying public, understands the concept of opportunity costs and holds the government responsible for this.

So, most will be happy that the Air India sale is off, and few will bother about the Rs 25,000-30,000 crore of extra losses over the next few years. No one, for instance, will hold Modi responsible for losing `330,000 crore by not privatising PSU banks four years ago—that is the fall in the market value of listed PSU banks relative to the market capitalisation of the entire banking industry since Modi came to power four years ago. In the case of MTNL and BSNL—the next contenders for Air India status—their combined losses have risen from Rs 6,807 crore in FY16 to Rs 7,734 crore in FY17. Since neither has any credible plan for revival—BSNL’s salary bill is 55% of its turnover and MTNL’s is 75%—not privatising them or shutting them down means an additional annual burden on the taxpayer; as a result of the losses, their combined debt has risen 65%, from Rs 15,803 crore in FY14 to Rs 26,145 crore in FY17.

And, that is without looking at the Rs 9,500 crore that MTNL will need to pay for spectrum next year in April when its current holdings will expire—since it doesn’t have the money, nor the ability to borrow, the government will have to pay for this. While it is a shame that the telecom minister should talk of mulling equity infusion into BSNL—it wants Rs 12,995 crore of free 4G spectrum—and MTNL instead of focusing on the losses to the taxpaying public, it is equally sad that, save a few, no one else is raising the issue at all. If prime minister Modi wants a Congress-mukt Bharat, he should know that an important part of this is shutting down the temples of modern India as the country can no longer afford to maintain them.