Will privatisation take off after the Air India sale?

The first PSU sale in 18 years is a positive sign but the window of opportunity may be short

Updated - October 22, 2021 12:23 am IST

Published - October 22, 2021 12:15 am IST

A man walks past a graffiti of Air India airlines on a street in Mumbai, India, October 19, 2021. REUTERS/Francis Mascarenhas

A man walks past a graffiti of Air India airlines on a street in Mumbai, India, October 19, 2021. REUTERS/Francis Mascarenhas

Earlier this month, the Tata Group emerged as the winning bidder for Air India , the debt-laden national carrier. In this year’s Budget, the government unveiled a bold new disinvestment policy that envisages a bare minimum presence of government-owned businesses even in the strategic sectors. The government is also pursuing the sale of its entire stake in public sector firms such as BPCL, Shipping Corporation of India, IDBI Bank, two other public sector banks and one general insurance company this financial year alone. Given India’s recent disinvestment record, this is an ambitious target. Ashok Chawla and Arvind Mehta discuss the implications of the sale of Air India for the future of India’s public sector, in a conversation moderated by Vikas Dhoot . Edited excerpts:

How did things come to such a pass at Air India? What do you think stalled previous attempts to initiate reforms or even sell the airline?

Ashok Chawla: About three decades ago, Air India was one of the world’s premier airlines. Then it slowly but steadily went into a spin. While an attempt was made in the early 2000s to see if it could be sold based on the recommendations of the then Disinvestment Commission, that didn’t move very far. Then, the Civil Aviation Ministry took the view that it would be good if two airlines — Air India and Indian Airlines — were merged. The merger took place in 2007 with a lot of euphoria but slowly it came to pass that such mergers are easy on paper but don’t work without cultural and operational synergies. The financial bills of the airline kept getting bloated and the model of a full-service airline became difficult to handle in the domestic sector with low-cost airlines coming in and overtaking Air India in a price-sensitive market. Air India could never recover. We are now told it was losing ₹20 crore each day, which is the ultimate nadir for the airline.


Arvind Mehta: I was part of the transaction team that was looking at the divestment of Air India and Indian Airlines in 2001. There were many factors that kept playing out. There was strong buyer interest, including from a corporate house which did not have aviation experience. There was muddying of the waters by some private airlines that feared competition if the transaction went through. To cut a long story short, in the ensuing confusion that happened amid lobbying of various kinds, there was also advice that the enterprise value of the airlines would increase if there was a merger, so when the divestment takes place, later you will get a better value. The government agreed and put the sale on the back burner. When the merger finally happened much later, it led to greater losses instead of better value.

Prime Minister Narendra Modi had said in 2014 that the government had no business to be in business. But over the last seven years, no public sector unit (PSU) sales materialised. Would the Air India sale, the first such transaction in 18 years, break the recent taboo associated with disinvestment in our political economy?

Ashok Chawla: It’s certainly a long-awaited positive signal regarding the public sector, and more so for domestic and foreign investors. In the last 18 years, irrespective of the government in power, there’s been share sales or transfer of shares from one pocket to the other but no genuine privatisation. There is euphoria and expectation, but as one can appreciate in all such matters, the proof of the pudding is in the eating. So, the euphoria needs to be tempered a bit. While the broad policy is there, once you get into the details, one doesn’t know whether there will really be a fairly robust pipeline of public sector entities which are up for offer with a symmetry between what the government offers and what the investors are really interested in. Second, there is the parallel track which the government is pursuing for fiscal mathematics, which is the monetisation track. If you push the disinvestment and monetisation tracks aggressively, then the issue of whether there is adequate appetite and capacity on the other side of the table will arise. Third, we have to appreciate that the process of disinvestment is long-drawn and complicated. It was the case even in the first round 20 years ago and not much has changed in that regard. Finally, I think there is the elephant in the room which one cannot ignore — what is the window of opportunity? The general elections are coming up in 2024. So, the window of opportunity for either this kind of disinvestment or for monetisation is, at best, 18 to 20 months. So, whatever the government can do with that to fulfill its broad objective of actually pulling back from business where it does not need to be in business, let’s hope it is able to do a fair amount... That would really be a welcome step for the stakeholders, the economy and the people at large.

Between 1999 and 2003, the National Democratic Alliance privatised 17 firms. Can we look at a similar streak in the window we have before the next Lok Sabha polls?

Arvind Mehta: In the [Atal Bihari] Vajpayee era, the commitment to privatisation was very strong. It started with the loss-making Modern Foods, then Balco, IPCL, the share sale of Maruti which gave controlling interest away... there was a momentum building up. But when the government finally came to the BPCL sale, the pushback started happening with many in Parliament questioning the sale of a profit-making central PSU, whereas you could possibly have a reason for doing it for loss-making PSUs. With that kind of pushback, there was a loss of momentum. And then, of course, the philosophy of divestment became entirely different with a coalition government supported by the Left. The real value I see in this Air India sale now is that again, there is clarity of thought. The government feels that whether it’s a loss-making or a profit-making Central PSU (CPSU), it is willing to make a strategic exit. That the DIPAM (Department of Investment and Public Asset Management) has found a mechanism for the strategic sale of a loss-making unit like Air India is also a positive, because it’s easy to sell something like BPCL that will attract buyers based on its enterprise value and profits. I hope that many other loss-making units that are continuously bleeding the taxpayers also find strategic buyers through the right sweeteners.

Explained | Will the Tatas be able to turn around Air India?

We have heard the usual criticism from trade unions and Left parties on the Air India sale. But do you fear that hiving off profitable PSUs will again attract a wider groundswell of Opposition criticism?

Arvind Mehta: There is the possibility that as and when profitable PSUs are sold, there will be stronger ideological battles and questions about why there is a need to sell the family silver, something which is giving good dividends, etc. It’s far more difficult to justify those kinds of sales; it would be easier to justify the loss-making sales.

Ashok Chawla: There will be the usual noises when profit-making enterprises are sold, but if the government clearly articulates its policy on what it wants to sell and what it wants to retain, I think the general consensus across the political spectrum would be that the public sector need not occupy the commanding heights of the economy. While people may object for the sake of objecting, as long as the process is run in a very transparent manner, I think there will not be too much objection.


Should some sectors like coal be a no-go area for divestment, even though the government has said it will retain bare minimum presence in strategic sectors? Should people be worried that one or two groups may get a lot of assets under their control as is happening, for instance, in airports and ports?

Arvind Mehta: The previous Finance Minister, Arun Jaitley, made a famous comment about the Air India sale. He had said that if you wait too long, there will be no airline left to sell. But yes, there is a role for certain kinds of countervailing mechanisms in a calibrated fashion… We shouldn’t do any fire sales and there has to be a watch on the market appetite. We don't want those kinds of sales which happened in certain countries where oligarchs came and just lapped up all the public sector assets and then became billionaires at the cost of the social good.


Of the 17 PSUs that were privatised, not a single sale was undertaken where the Cabinet Minister was in charge of a PSU with operations in their home State, as per a study. Do you expect such tendencies to crop up this time round?

Ashok Chawla: I guess that’s been the case in all the major economic moves to some extent. But 2021 is very different from 20-30 years ago. It’s not much of a problem now because the political resolve is strong. The whole process will get further energised if it isn’t perceived as something the government wants to do because it doesn’t have money. The perception is that the government is pressed to the wall; that it is trying to push privatisation and monetisation because ‘ paisa nahi hai (there is no money)’ and it needs money for welfare programmes. With DIPAM under the Finance Ministry, unlike earlier when disinvestment was a separate ministry, it sends a signal about balancing the books. There should be a separate ministry or commission which reports directly to the Prime Minister’s Office. That will make things far simpler for the mechanics of implementing disinvestment plans, and minor political issues of whether a particular minister is happy or unhappy will not really come to the surface. The focus should now be totally on efficiency, productivity increases, not the fiscal focus on balancing the books.


Arvind Mehta: For a strategic sale, it used to always be difficult to convince the concerned ministry in charge of a PSU to come fully on board, because for them, it was a sense of loss. There would always be various reasons they would give for why it’s not the appropriate time. They had no problem with part share sales as long as ownership control did not go out of the ministry’s hands. So, that kind of a problem always remained and that’s why I said strategic sales are far more difficult than part sales of shares. But I think the mood has changed now. The Prime Minister has said that the government has no business to be in business. He has made it clear that he doesn’t want to see IAS officers and others running a PSU and being changed from time to time. I think that kind of mindset earlier where a ministry could try and sabotage a strategic sale... I don't think we are going to see that kind of resistance in this time period. But what worries me actually is the narrative that goes out that the government is doing the sales because it needs to cover its fiscal deficit. That narrative is very damaging because then in the public perception, it is simply a sale of the family silver. So, I would be happier with a narrative that does not talk about the monetary aspects so much but is one that simply says that we are convinced that society is better off by having this not being a government-run entity anymore.


Arvind Mehta was Secretary to the Fifteenth Finance Commission, served in the Department of Disinvestment in two separate stints, and is now a senior fellow in the NITI Aayog; Ashok Chawla served as Secretary to the Government of India in Ministries such as Civil Aviation and Finance and retired recently as Chairperson of the Competition Commission of India

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