Will Modi Succeed Where Vajpayee Failed?

Fiscal year 2017-18 is proving to be a tough one for Prime Minister Narendra Modi’s government. The economy is slowly recovering from a big-bang disruption like demonetisation. There is uncertainty over government revenue collection target after the rollout of the goods and services tax from July. The country’s gross domestic product (GDP) growth has slowed down to 5.7 per cent in the first quarter. Unresolved bank non-performing assets measure in billions of dollars. Telecom sector companies are looking for a bailout. The implementation of Real Estate Regulatory Authority has spurred a rise in home prices as construction of new units seems to have come to a halt. And not to forget, manufacturing and exports have crashed.

While critics have demanded answers as to why the economy is in such a mess, sympathisers have said most of the steps taken by the Modi government are part of a deep surgery which was necessary to lay the foundation for a stronger and sustainable growth in the long term.

However, even the government’s well-wishers have lampooned it for following a procyclical economic policy in times of slowdown when it should rather be cutting taxes and increasing spending. The government’s obsession with cesses and raising taxes despite services having gotten expensive on the back of a higher GST rate, has irritated even its supporters.

It’s only the first quarter and the government has managed to register a fiscal deficit of Rs 5.05 trillion, making up 92 per cent of the year’s target. With uncertainty from GST proceeds looming large over revenue collections, meeting the fiscal deficit target of 3.2 per cent of GDP appears to be a tough ask, especially in the current economic climate when calls for fiscal stimulus are getting louder and the rationale behind it stronger.

However, there appears to be a silver lining amidst the gloom. The case for disinvestment in central public sector units (CPSUs) has greatly strengthened. That is probably not because it’s the right thing to do or that government has no business being in business, but it’s because Finance Minister Arun Jaitley is a stickler for fiscal consolidation with a reputation to meet revenue targets either by hook or by crook. If cesses are what you may call the “crook”, then disinvestment seems to be Jaitley’s “hook” this year.

Since liberalisation of the economy in 1991, the union government has missed its disinvestment target 17 times in the last 26 years, including in the last three years under Prime Minister Modi. Despite this history, the Finance Minister set an ambitious disinvestment target of Rs 72,500 crore in this year’s budget. However, unlike in the previous years, it is more likely that the government will achieve its target this year because of Jaitley’s resolve.

Of the total Rs 72,500 crore, the government is looking to raise Rs 46,500 crore by selling minority stake in public sector undertakings (PSUs), Rs 15,000 crore from strategic disinvestment and Rs 11,000 crore from the listing of various PSUs, mainly insurance companies and defence units, this year. Strategic disinvestment involves sale of significant shareholding, including management control.

The amount of Rs 46,500 crore may appear unrealistic given that it’s equal to the total money government accrued from all disinvestment last fiscal. However, a significant part of it, Rs 30,000 crore, will come from selling 51.11 per cent stake in Hindustan Petroleum Corporation Limited, to Oil and Natural Gas Corporation Limited, for which the union cabinet has already given an in-principle approval.

Additionally, the government has sold 7 per cent stake in NTPC Limited, raising Rs 9,100 crore. Next up is 15 per cent stake sale in Neyveli Lignite Corporation India Limited, which could fetch another Rs 2,500 crore.

The second category (for strategic sale) includes firms like Bharat Earth Movers Limited, where the government is looking to shed its share from the current 54 per cent to 28 per cent. Other companies like Scooters India, Pawan Hans, Hindustan Newsprint, Ferro Scrap Nigam, Bridge & Roof Company India, Bharat Pumps and Compressors, and Project and Development may see 100 per cent disinvestment. Sale of Central Electronics Limited has already been approved by the government.

Under the third category, i.e. by way of public offering, the government is planning to divest 25 per cent stake each in four defence units—Bharat Dynamics Limited, Garden Reach Shipbuilders & Engineers Limited, Mazagon Dock Shipbuilders Limited and Mishra Dhatu Nigam Limited—and three insurance firms, HDFC Standard Life, New India Assurance and General Insurance Corporation of India. This would yield nearly Rs 20,000 crore.

The biggest and most interesting development that is likely to take place in this fiscal, however, is the sale of Air India, the loss-making airline that is guzzling taxpayer money in spades. The union cabinet bit the bullet in June and gave a formal nod to privatise Air India and five of its subsidiaries.

The Economic Survey had recommended the same earlier this year.

Former prime minister Atal Behari Vajpayee’s government tried to privatise Air India in 2001 when the wind of privatisation was blowing strong in the power corridors of Raisina Hill. A consortium of Tata Group and Singapore Airlines was in the final stages of buying a majority stake in the airline, but the 2001 bombing of Bandaranaike Airport in Colombo by the Liberation Tigers of Tamil Eelam destroyed several aircraft of Singapore Airlines. This, in addition to other financial troubles that the airline was facing led the consortium to call off the deal, former divestment secretary in the Vajpayee government, Pradip Baijal, told Bloomberg Quint recently.

The government-run airline had 30 per cent share in domestic traffic at the time. In 2005-06, it made a profit of Rs 16 crore. But the UPA government merged it with Indian Airlines, and the merged entity ordered new planes worth Rs 50,000 crore, most of which were bought by taking on a heavy debt. Things have been going downhill ever since for the airline; its share in domestic traffic has now dropped to 14 per cent.

So, will Modi succeed where Vajpayee failed?

The government is moving quickly on the sale and it appears that it wants to do it as soon as possible. After giving the green light for its sale in June, the government formed an alternative mechanism led by Jaitley, reminiscent of the UPA’s Group of Ministers era, to speed up the process of privatising the airline. The panel, which includes Civil Aviation Minister Ashok Gajapathi Raju, Railway Minister Piyush Goyal and Commerce Minister Suresh Prabhu, is looking into various aspects related to its Rs 52,000 crore debt, transferring some assets to a shell company, and strategic sale of its profit-making subsidiaries. On 30 August, after a meeting of the panel, the government decided to appoint transaction advisers who will advise and assist the government in carrying out the disinvestment.

Bird Group, which is active in ground-handling operations at seven airports, has expressed interest in acquiring Air India’s ground-handling arm, Air Transport Services Limited. The airline is also getting rid of its non-core assets such as flats, residential and commercial land plots, and so on. It got a good response recently to an auction when 10 of the 14 properties put up for sale received more than their reserved price. Low-cost airline IndiGo has already sent in a formal letter evincing interest in acquiring the international operations of Air India and Air India Express. “Alternatively, we are interested in acquiring all the operations of Air India and Air India Express,” the letter read. Many others have also shown interest but not formally.

What makes Air India attractive is its international traffic market share (17 per cent), which is the largest in India with a fleet of 140 planes, including 23 Boeing 787 Dreamliners, training centre with Boeing 777 and 787 Dreamliner aircraft simulator, Star Alliance tag, which cost Air India more than $100 million, four $300 million slots at London Heathrow airport and many such at other international airports, largest number of aircraft hangars in the country, big art collection and attractive real estate in prime locations.

With the kind of concerted effort the government is putting into privatising Air India, it seems that the taxpayers will be relieved of the pain by the end of this fiscal. It’s a golden opportunity the government can’t afford to miss.