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On This Day - 16 NOVEMBER 2011
Bailout v/s bankruptcy- Which one is better?
In this issue:
Will Italy be able to get back on its feet again?
Will Euro die faster than the Dollar?
Will China now replace US as the new superpower?
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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.
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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