A king's ransom

By Swapan Dasgupta

Prime Minister Manmohan Singh is an extremely cautious man—a reason why he has endured in the cut-throat world of public life for nearly three decades. Yet, for a brief moment last week he, very uncharacteristically, almost let his guard down. I say ‘almost’ because, like a good politician, Singh was careful enough to leave for himself an exit route.

The issue was the kerfuffle over the Vijay Mallya-owned Kingfisher Airways which is in dire financial straits, having defaulted on its payments of aviation fuel and having cancelled nearly 50 flights on one day, much to the chagrin of fare-paying passengers. On his return flight from the SAARC summit in the Maldives, the Prime Minister was asked about the issue in his customary on-flight interaction with the media. He cautiously prefaced his remarks with the caveat that “I have not applied my mind to Kingfisher’s problems”. But then he went on to add: “When I get back, I will talk to (Civil Aviation Minister) Vayalar Ravi and we will explore ways and means in which the airlines can be helped.”

A few years ago, such a gesture by a Prime Minister to help an ailing Indian company, public sector or private, would have been treated as pretty routine and, indeed, obligatory. Trade unionists would have been up in arms against possible job losses and may have even called for a nationwide airlines strike that in turn would have forced the government’s hands; the Left would have declaimed about the pitfalls of deregulating a ‘strategic’ sector and may well have called for the restoration of Air India’s monopoly over domestic air travel; and well-heeled industrialists and MPs would have discreetly lobbied the Finance Minister asking him to instruct the public sector banks to offer extra lines of credit to a company in difficulty.

This was how business was done in India in the bad old days, when the ‘commanding heights’ of the economy corresponded to the imperatives of the ‘socialistic’ pattern of society. It is a commentary on how much India has changed in the 20 years of liberalisation that none of this happened. Instead, public opinion—howsoever imperfectly that is measured—appeared to veer round to the view that Mallya must be allowed to stew in his own juice and that special accommodation to Kingfisher by the political class would be tantamount to crony capitalism. From CPI(M) MPs to the ever-voluble Rahul Bajaj, it was agreed that it was bad form to nationalise losses and privatise profits.

So huge was the outcry against any proposed bailout or politically-inspired ‘restructuring’ of Kingfisher’s debts that both the Civil Aviation minister and those claiming to speak for the Prime Minister had to beat a hasty retreat. Instead, stern-faced bankers made it clear that there was no question of pouring in more good money into a bottomless pit. Like the much-despised International Monetary Fund, the banks demanded ‘conditionalities’, most notably a fresh infusion of equity by the promoter, if necessary by the conversion of inter-corporate debt into equity.

It is not that there was no appreciation of Mallya’s assertion that the various social obligations of domestic carriers—such as servicing the North-east—put unacceptable burdens on an airline. There was also a realisation that the restrictions on foreign direct investment, the huge sales tax burden on aviation fuel and exorbitant airport charges made it impossible for the aviation sector to grow. However, there was also the corresponding appreciation that while the sectoral grievances needed addressing, these were issues that weren’t specific to Kingfisher. For example, it was noted that the low-cost airline IndiGo had returned profits, despite operating in a difficult environment, because it had a robust business model. If Kingfisher was to be ‘accommodated’ for its quirky management style, why shouldn’t IndiGo be rewarded with lower interest rates as a prize for efficiency?

The manner in which the debate was conducted over the past week is very revealing and has implications for the future of economic decision-making.

First, it is clear that future bailouts of the limping public sector Air India is going to be fiercely resisted on the strength of the argument that there has to be a level playing field for all companies, including the public sector.

Secondly, it is clear that in the coming months cosy bailout packages for profligate or inefficient private sector companies that have good political connections will be fiercely disputed in the political arena. Coupled with the 2-G scam and the public movement against crony capitalism, the space for leveraging political clout in business has shrunk. Bankers will be wary of sticking their necks out and politicians will be loath to put in the proverbial good word to the government on behalf of those corporates that have made a virtue of adding to non-performing assets.

Finally, on a more reassuring note, there is a greater awareness today that the Indian corporate sector is suffering from sustained anti-business policies of the government and the regulators. In the past, ‘socialist’ politicians preferred to use their discretionary powers to favour individual businesses. The focus is now likely to shift to creating a wholesome environment for sectors of the economy. In other words, the nature of the business rather the ownership of the business will engage the attention of policy makers. Which is all for the general good.


Deccan Chronicle/ Asian Age, November 18, 2010