India's own bailout package

Fri, 19 Feb Pre-Open

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It is not the business of the government to be in business. A few years ago, staunch capitalists would have agreed with the statement. But such a stance would now be difficult to take. After all it was the government that bailed out the collapsing financial sector in the strongest bastion of capitalism - the US.

India didn't walk down a completely capitalist path after independence. It chose a more balanced approach where Five Year Plans co-existed with private enterprise. The Indian government has a large presence in business. Many times with unfortunate consequences. Corporate decisions are overridden by political objectives. Perhaps the best example is the fate of oil marketing companies - Indian Oil, BPCL, HPCL- in India. Their products, i.e. fuels, have few viable substitutes. The companies have highly valuable assets in place. Their distribution network reaches far and wide. Yet, they incur heavy losses. Due to the simple fact that market determined fuel price is a bitter political pill to swallow.

The oil marketing companies have company in their misery. The aviation sector. State owned carrier National Aviation Company of India Limited (NACIL), runs India's national carrier Air India. Not very profitably though. The airline had posted a loss of Rs 72 bn in the last two financial years. The reason is not government interference. It has more to do with the lack of focus on efficiency which comes naturally to private sector companies. Things are so bad that now the government has approved a bailout package for Air India. It will get Rs 8 bn in fresh equity from the government. It will go towards tiding over the carriers' cash flow problems and fleet acquisition.

Interestingly, the government has asked NACIL to take several steps. Rationalise manpower and link incentives to productivity. Integrate the erstwhile Indian Airlines with Air India. Review all agreements on operational matters. Return all leased aircraft. Cut down on wasteful expenditure. Close all overseas offices which are not required. Basically, cut costs. Become more efficient.

So then, is it really the business of the government to be in business? Government's presence often defeats genuine commercial interests. Quite often it leads to an easy going attitude and inefficiencies. Hence there is definitely a case of lesser involvement of the government in business. But before we go overboard with the idea, we must remember the dangers of unbridled private enterprise. After all, unchecked and poorly regulated free market mechanism was at the heart of global financial meltdown. In our view, the government should get involved only when it absolutely must. That role should usually be that of a helpful but alert regulator.