Lesson learned from selling Air India

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In the 1950s, Atal Bihari Vajpayee, a first-time parliamentarian, asked about the Ashok Hotel then being built in Delhi: why did the government build a five-star hotel and not a hospital? The usual socialist ideological response of insufficient private capacity was inapplicable; Jamsetji Nusserwanji Tata built Mumbai’s magnificent Taj Mahal Hotel in 1903. Prime Minister Nehru replied that hospitals would be built from the luxury hotel’s profits. But Vajpayee’s main question concerned strategy, the trade-offs that balance unlimited aspirations with limited resources. The sale of Air India is important for three reasons – priorities, resources, mindset – and is a blueprint for the Indian state to do more by doing less.

First, priorities. When corporate strategy is the art of creating unfair legal advantages, no government can run hotels, automobiles, or steel companies competitively. Public commercial companies face unfair human resource disadvantages. Air India had 12 unions, employees per plane met two global standards and staff costs accounted for an unusual 20 percent of revenues. Even if the state’s commercial activity created wealth, then Pakistan or North Korea would be thriving economies. The core function of the state – security, primary health care and education, research funding, the administration of justice, etc. – suffered post-independence as scarce public resources were diverted to things the private sector could do better. The sale of Air India represents a welcome change of course.

Second resources. In 1953, Hungarian economist Janos Kornai warned that state-owned companies indulge in “investment hunger” and fear no losses because they know they will be bailed out. Around the same time, Air India cost the government just Rs 2.5 crore to buy, but it has burned Rs 1.1 lakh crore since 2009 (this could fund 15 years of school lunches or be used to set up 660 medical colleges). Kornai referred to this excessive cash hunger as “soft” budget constraints. The Supreme Court agreed, calling Air India’s 2007 purchase of 111 aircraft for Rs 67,000 crore “unnecessary”. Air India’s nationalization cost around Rs 20 crore in losses a day and its monopoly caused a 25 year lag as India became the third largest civil aviation market.

The government’s creativity and tenacity in divesting Air India must be emulated in most of the 360+ remaining core assets. In parallel, as state government finances have also been devastated by the pandemic, states privatizing over 1,500 poorly managed state PSUs could ease fiscal woes. Federalism is also about responsible use of public funds provided by taxpayers and transferred by the government of the Union.

And third, the mindset. The 1970s government’s belief in its omnipotence is captured by PMO bureaucrat PN Haksar’s response to a request for private scooter capacity expansion – reject it and found Scooters India (another mishap). The command, control and conquer mentality of the Avadi Resolution of 1955 – centuries-old second-hand ideas from a dead German – ignored our folk wisdom of Jahaan Raja Vyapaari, Vahaan Praja Bhikaari. Who is responsible for the Air India bonfire? Politicians, bureaucrats, managers or workers? Unfortunately, the management of the public sector mirrors Agatha Christie’s murder on the Orient Express – when everyone did something, no one can be held accountable. Contrary to intuition, many individuals involved in the Air India disaster achieved higher career heights due to performance feedback mechanisms that prioritize visibility, awareness and silence over tangible results. The “deadly conceit” represented by Air India’s seven-decade tragedy suggests that we need a better division of roles between the three pillars of Team India – private, public and non-profit organizations. Or what the poet Brij Narayan Chakbast Anasir called my zahur-e-tarteeb (order between the elements).

No official running Air India could deliver the “sound from above” that JRD Tata did. One employee recalls, “JRD walked the plane, checking furniture for stains, toilets for cleanliness, curtains for fraying and windows for dust.” indistinguishable from coffee. I don’t know if that’s due to the quality of the tea leaves or excessive brewing.” Some analysts think the Tata Group acquisition is unprofitable nostalgia, but the price feels right, the consolidation of three airlines creates synergy, and the 60% market share of a competent competitor creates vulnerability. Most importantly, if entrepreneurial business houses like Tatas aren’t making risky but industry-changing bets like Air India, who will?

Under Deng Xiaoping and Zhu Rongji, China converted over two-thirds of its state-owned enterprises into private ownership and increased productivity many times over. Under Xi Jinping, China is piling up debt, shoveling cheap credit into unproductive state-owned companies and attacking the private sector. China is powerful because of a $14 trillion GDP fueled by private entrepreneurs, foreign investors and multinationals. China is dangerous because it now accounts for half of Asia’s military spending. India lost the 1962 war for many reasons, but the public appeals to knit socks, gloves and sweaters for our ill-equipped soldiers certainly reflected a weak economy and poor political prioritization at the time. Privatization hardly means a weak or small state; A modern state is a welfare state. But Norway, Sweden and Finland’s top positions in government spending as a percentage of GDP are funded by their private efficiency. We hope India’s tax on GDP increases from 18 percent to 30 percent in our lifetime, powered by a large, dynamic and inclusive economy that funds targeted, accountable and decentralized government spending.

In 1984, JRD Tata told the now-retired PN Haksar, “I started my 55-year career as an angry young man because I couldn’t stand the foreign rule…I’m ending it an angry old man…because of the system of licenses and controls, not only discourage honesty free enterprise, but also encourage a new breed of incompetents, bribe takers and tax evaders”. Titans like JRD certainly go to peaceful places after leaving us, but we’re sure he’s smiling today as Air India returns home, 70 years after his 20-year-old son was kidnapped.

This column first appeared in the print edition on January 27, 2022 under the title “Do more by doing less”. Sabharwal and Mantri are co-founders of Teamlease Services and the India Enterprise Council respectively

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