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Disinvestment of Air India

  • IASbaba
  • October 21, 2021
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Oct 9: TATA Air India! (Disinvestment of Air India) – https://youtu.be/wIxc8o6W478

TOPIC:

  • GS 3: Indian Economy

Disinvestment of Air India

In News: The government announced its decision to sell all its stake in Air India (AI) as well as AI’s stake in two other businesses — Air India Express Ltd (AIXL) and Air India SATS Airport Services Pvt Ltd (AISATS). The Tatas will own 100% stake in AI, as also 100% in its international low-cost arm Air India Express and 50% in the ground handling joint venture, AI SATS.

Why was Air India sold?

The sale of Air India to a private player has been in the offing for a long time. AI was started by the Tata Group in 1932, but in 1947, as India gained Independence, the government bought 49% stake in AI. In 1953, the government bought the remaining stake, and AI was nationalised.

For the next few decades, the national carrier dominated Indian skies. 

  • However, with economic liberalisation and the growing presence of private players, this dominance came under serious threat. 
  • The government running an airline did not quite gel with the mantra of liberalisation.
  • By 2007, AI (which flew international flights) was merged with the domestic carrier, Indian Airlines, to reduce losses. the has never made a profit since 2007.
  • In fact, since 2009-10, the government (and indirectly the taxpayer) has spent over Rs 1.1 lakh crore to either directly make up the losses or raise loans to do so. 
  • As of August 2021, AI’s debt was Rs 61,562 crore. Moreover, every additional day that AI remains operational, the government suffers a loss of Rs 20 crore — or Rs 7,300 crore per year.
  • The first attempt to reduce the government’s stake — disinvestment — was made in 2001 under the then NDA government. But that attempt — to sell 40% stake — failed.

How did the Government sell it this time?

  • As long as the government kept a certain shareholding of AI, private players did not seem interested. That’s because the mere idea of government ownership, even if it was as little as 24%, made private firms wonder if they would have the operational freedom needed to turn around such a heavy loss-making airline. Unlike all the past attempts, this time the government put 100% of its stake on sale.
  • This time, the government let the bidders decide the amount of debt they wanted to pick up (earlier the Government expected the bidders to pick up a certain amount of the debt along with the airline)

Both of the above changed stances worked. 

Significance: Disinvestment of Air India

Positive: 

  • Underscores PM Modi’s commitment to reducing the government’s role in the economy; he can claim to have saved taxpayers from paying for daily losses of AI. 
  • A message from the Government to the markets and global investors that it has the political will to bite the reform bullet.
  • Given the historical difficulties in AI’s disinvestment, or any disinvestment at all (see table), this is a significant achievement.

Negative:

However, purely in terms of money, the deal does not result in as big a step towards achieving the government’s disinvestment target of the current year. 

  • Of the total AI debt of Rs 61,562 crore, the Tatas will take care of Rs 15,300 crore and will pay an additional Rs 2,700 crore in cash to the government. That leaves Rs 43,562 crore of debt.
  • The assets left with the government, such as buildings, etc., will likely generate Rs 14,718 crore. But that will still leave the government with a debt of Rs 28,844 crore to pay back.
  • So, it can be argued that if the government had run AI well, it could have made profits and paid off the debts — instead of selling the airline (that can make profits) and still be left with a lot of debt.

Challenges before TATA Group

From the Tatas’ perspective, apart from the emotional aspect of regaining control of an airline that they started, AI’s acquisition is a long-term bet. The Tatas are expected to invest far more than what they have paid the government if this bet is to work for them.

  • At the brand level: What will Air India stand for? Its greatest challenge will be to bring together the three airlines now under its control — – Air India, Air Asia and Vistara. There will be a need to oversee core synergies that include buying parts for aircraft common to its full-service carriers Vistara and Air India, engineering services, repairs and maintenance, and consolidation of busy slots during festive season. Plus, the matter of staff, pilots and ground officials, and ensuring there is enough communication going on between trade unions and the group.
  • Up and running again? The responsibility of managing and turning it around will be the sole responsibility of the conglomerate. If that is something that the group has taken into account, it may have an edge when it comes to dominating the sector. If not, finding answers may become a burden. The benefit of moving from a fragmented industry dominated by one player to a race where there is a second strong airline group could well inculcate discipline in pricing and contribute to a market that also grows and sustains.
  • COVID-19: The Tatas will be flying into an aviation market reeling from the coronavirus pandemic that has left India’s airlines bleeding cash. This will make restoring Air India’s fortunes even tougher.
  • The Logistics: One of the immediate challenges facing the new owners will be to find office space. The deal does not include the airline’s other assets and the buildings like the Air India building at Nariman Point and Airlines House in Delhi. As a result, one of the Tata Group’s first jobs will be to locate office accommodation for Air India’s roughly 12,000 employees. The Tata Group will also have to launch a global manhunt for top personnel who will need to pick up the reins very quickly. 

Can you answer the following questions?

  1. Recent budgetary announcement regarding disinvestments and privatisation? Discuss.
  2. The disinvestment process is a proof of government realising its true role in democracy. What is this role and how does it affect the democratic functioning? Critically analyse.

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