Sure Mr Jaitley, Air India Can Be Sold But You May Have To Pay Someone To Buy It

No statement made by any NDA minister made so far is as significant as the one made by Finance Minister Arun Jaitley on Saturday (27 May), where he called for the divestment of Air India. “If 86 per cent of the flying can be handled by the private sector, they can handle 100 per cent also,” he said.

But his views on public sector banks were underwhelming. While pointing out that we don’t need 30-32 public sector banks of various kinds, his solution seems to be the merger of weak banks. He said, “we want fewer banks, but bigger and stronger banks…”. This is a vain hope. Bigger does not always mean stronger, as the sharp drop in State Bank of India’s consolidated profits post the merger with its five subsidiaries and the Bharatiya Mahila Bank shows. Merging the other losers in the banking sector is hardly going to build a stronger bank.

The point is simple: why should not the Air India logic work for public sector banks too? If 30 per cent of banking can be handled by private sector banks, why not 70 per cent – the current share of public sector banks? Why not reduce the public sector banking footprint to a level at which it will not sink the government’s fiscal boat whenever the business cycle goes for a toss?

One political answer could be that financial inclusion and social needs are better met by public sector banks, since the private sector is unenthusiastic about creating customers who only entail costs. Out of the 286 million Jan Dhan accounts now in operation, barely 10 million was contributed by private sector banks.

But this is not an issue one cannot fix. First, it is wrong to believe that since government owns public sector banks, they can be saddled with all the costs of financial inclusion. Second, the issue is only about incentivising the private sector. If unviable road projects can be financed through viability gap funding, if private carriers can be subsidised to fly on uneconomic routes (the Udaan scheme of the civil aviation ministry is just that), why is it so difficult to offer an open bid for handling low-value customers, where banks can bid for the subsidies to handle such customers? Similarly, when private couriers can handle most of what the Post Office does, why not offer an auction-based subsidy to any private courier willing to run essential, but low-value postal services, as long as they are needed?

The point is simple: the public sector sometimes delivers essential services to ordinary people that cannot be done away with in a democratic society, but it does not follow that the private sector cannot do the same, as long as the level of subsidy is the same or less. Let the most efficient entities bid for those subsidies.

Why can’t rural telephony be similarly auctioned to any bidder? If the state-owned BSNL can provide the lowest rate of subsidy instead of being allocated money collected from all mobile operators, it can retain its rural subsidies collected through the universal service obligation levy collected from all operators.

This is the time to not just think about what to do with one white elephant (ie, Air India), but all other present and future white elephants in the public sector. Sooner or later, barring a few cash generators in defence or the energy sector, the entire basket of public sector companies will go to rot.

It makes little sense to only think about privatising or selling Air India, when the political capital needed to get any idea of privatisation through an opposition-dominated Rajya Sabha is enormous.

Two options the government could consider are the following:

One is to legislate a golden share in all public sector companies by amending, through one law, all major nationalisation acts that created public sector companies in aviation, telecom, coal, oil, banking, et al. One clause needs to be inserted in all these laws to enable government to sell, say, a 90 per cent stake (while retaining 10 per cent) in public sector companies while retaining a strategic right to 51 per cent voting that can be invoked for clearly outlined public interest or national emergencies. This will allow for effective economic privatisation without giving it that political colour. At a future date, if a Rajya Sabha majority is available, formal privatisation can be done by abolishing the golden share.

If the above sleight of hand is not possible, the government should put all government holdings in a holding company, and use surpluses from one entity to fund the losers for a while, but the larger aim should be to privatise underlying assets (like ITDC selling its hotels and land, but not the company itself), or BSNL selling off its surplus land. Sale and leaseback deals – popular in aviation – can be tried with all public sector assets. Land is one asset that may be easily monetisable – and even salable politically if it is intended for affordable housing in cities. The public sector has thousands of hectares of unused land which can be monetised.

The proposal to sell off Air India is a golden opportunity to rethink the idea of having public sector companies in all non-strategic areas, and especially where private competition is capable of meeting consumer needs efficiently.

Jaitley should convince his boss Narendra Modi that there is no getting away from the ‘P’ word - privatisation. The opposition could even be bought off by being promised 50 per cent of all sales proceeds in proportion to their share in population or some other formula.

Jaitley needs to remind his boss that Air India has Rs 50,000 crore of loans, against aircraft valued at Rs 25,000 crore. So even if some other assets have value, Air India can be sold only along with a free gift of Rs 15,000-crore, or more. This much of loans will have to be written off, and we are being optimistic about this.

The question he should ask Modi is this: should we sell the other assets before they too turn to dust like Air India?