Bailout v/s bankruptcy- Which one is better?
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In more recent times, there has been a lot of hoopla about whether Kingfisher Airlines, which is facing a serious cash crunch, should be bailed out or not. Of course, we believe that market forces should decide whether a business should survive or shut down. After all, bailing out a business means using public money to save a private enterprise. Society cannot operate on the principle of privatised profits and socialised losses. Moreover, bailouts send out the wrong signals. They incentivise businesses to be reckless, that no matter what they do, the government is always going to come to their rescue. Of course, there is no denying that there can be times when bailouts may be necessary. But they should be reserved only for such rare cases wherein there is a threat of a system-wide collapse.
Going back to the case of Kingfisher Airlines, another question that arises is whether the airline company is right in asking for a bailout. We don't think so. The simple reason being that tomorrow if the company were to make record profits, will it be willing to share those with the taxpayer? Certainly not! How then can it expect to be bailed out using the very same taxpayer's money? Nevertheless, there is a section of society out there that favours a bailout of the embattled firm. For us though, the choice has been clear right from day one. Please do not get us wrong. We are not against the firm and we believe that Kingfisher Airlines is one of the better airlines around. But we have issues with any firm being bailed out. As the developed world has shown, a bailout only amounts to kicking the can down the road and does not solve the real problem. Thus, for a full blown recovery, either a restructuring or a complete elimination of the issue at hand is required.
According to you, should failing businesses be bailed out or allowed to go bankrupt? Share your comments with us or post your views on Facebook page / Google+ page.
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Data source: Business Standard *Figure upto September, 2011 |
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The per-capita expenditure in rural market is half that of the urban market. But with 150 million households, rural India is nearly three times bigger than urban India holding immense potential demand. Nielsen has forecasted rural FMCG sales to leapfrog from the current US$ 12 bn to US$ 100 bn by 2025. As per the research agency, factors such as higher demand for premium products, brand consciousness and shift from occasional to regular consumption will be the future demand drivers in rural India. FMCG companies have been scrambling to grab a share of the growing clout of rural India. But companies such Hindustan Unilever Ltd (HUL) and ITC Ltd which have developed a strong rural network have a distinct advantage.
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35 Responses to "Bailout v/s bankruptcy- Which one is better?"
Shabbir Dossa
Nov 16, 2011Its a catch 22. Yes, the question of taxpayers bailout is not the right solution as future profits are not shared with the tax payers but also there lots of jobs at stake and lots of families life is at stake. So the its a tight rope between these two options. It all depends how rich the goverment is and if it can afford to bailout and it has to be with conditions like the goverment get a stake in the business so in future the profits are shared in the form of dividends.
spsingh
Nov 16, 2011Air India is one of the few companies FULLY owned by govt of india, which has not paid the salary of its employees in full for last eight years. many of the employees have died in the hope of getting their salaries.How many more government organisations are there where employees are not paid their salaries is not known to me. but government of india is not rated under the defalt category is totaly unjustified.
SPSingh
Col Pradip Mitra
Nov 16, 2011Bankruptcy is the better choice. Bailouts at what expense? not at the cost of the tax payers money. The spirit of competition is lost by a bailout.Lets not allow inefficiency to set in.
Nandkishore
Nov 16, 2011IN CASE OF A BAIL OUT AND TURNAROUND IN KFA,the Government will definitely take its pound of flesh as taxes (IT and other). Whether that counts as repaying to the public is just a matter of opinion! BTW, the bail-out if it happens is going to be by the Govt only, and not directly by public. It may be worth considering that such companies are made to pay a higher tax rate
John Daniel
Nov 16, 2011Bailing out is a drum card to be used in inevitable situation where in a public interest is the key. It's true that Kingfisher allowed to have a competitive environment in the Indian airline sector but it comes from a business house and it is not the only business they have. As said rightly when in profits these capitalists never share a penny to the public where as when they see a loss they want to take undue advantage of the situation. I think it is not fair and justifiable. The loss is not incurred in a day but a long term phenomenon. Hence Kingfisher management should have taken due diligence in maintaining their business in profit. Else they should have grounded the flights long back or at least when they felt the pinch of loosing money. There is no reason to bailout Kingfisher as there are lot of other players in our country and we do not have any more monopolised business.
Suresh Kumar
Nov 16, 2011Industries susceptible to high demand fluctuations, coupled with high capital costs and international exposure need to manage their operations and cash very efficiently. This is true for aviation, steel and a host of others. Hence, salary of managers and directors and leasing costs should be structured depending on profitability. Unfortunately, this factor is ignored and sometimes directors are paid millions of dollars. But, during bailout, they dont mind approaching the government. The other issue is a semblance of parity in terms of taxes and duties. Aviation fuel is the costliest in India and the air fare probably the cheapest. The government needs to be practical on taxes. Regarding interest rate and associated costs, the companies need to manage their operations well and look at sources of financing other than debt.
Prashant Pandey
Nov 16, 2011True that mismanagement was one of the reason however look at the tax paid by the airlines in India...among the highest in the world. So it's not right to say that only losses are socialized. Not exactly bailout but rationalization is definitely needed.
Narendra Tiwari
Nov 16, 2011Fully agree with U, as the Industry becomes sick, not the enterpreneur. The main cause for Industry becoming sick is enterpreneurs mis-management only. why the issues being raised now were raised at the good times? Its a total manipulation and share market game.
Ravindra Deshpande
Nov 16, 2011Very aptly you have stated 'Society cannot operate on the principle of privatised profits and socialised losses.'
USA- an epitome of Capitalization has taken the socialist steps- infusing state capital for bail outs and the USSR went for privatization. There may be issues wrt Air India, but it has shown its sense of social responsibility in calamities.
Bail out can not be the solution. Change in Policies that allow FDI in aviation, without compromise in national security can be a solution.
Bharat
Nov 16, 2011Bailing out a company or a country is like robbing Paul to make Peter rich. The companies or countries who are in need of a bailout have operated lavishly/ineficiently/ieffectively, wasted resources and not used money properly. It seems to me that India will be sooner than later in a bailout situation if we do not use our resources effectively.