governance, political economy, institutional development and economic regulation

Posts tagged ‘Air India’

Follow the money to tackle the fiscal perfect storm

Piyush Goyal 2

Piyush Goyal, the interim finance minister, will need to be a lucky general if he is to overcome the triple challenge of widening trade and fiscal deficits and lacklustre private investment.

Exports – India’s achilles heel

Despite our comparative advantage of cheap, skilled labour and entrepreneurial zeal, export pessimism is endemic — unlike in China. Last year we imported goods worth $460 billion, while exports were just $303 billion, leaving a trade gap of $157 billion. We try and cope with the trade deficit by mimicking the American economy — minus the pull of its global currency. We maintain a strong, stable rupee and high interest rates to encourage inward financial flows of capital to plug the deficit in the external account and protect our foreign reserves.

Our saviors – inward remittances from Indians in the Gulf

Gulf workers

We are blessed that our valiant expatriates in the Gulf states regularly repatriate their foreign earnings to finance their families struggling to survive in India. Net inward remittances — around $70 billion per year — cover around one-half of our trade deficit. The inward flow of foreign direct investment and “hot money” flowing into our equity and debt markets provide the residual foreign exchange for imports.

Aping America’s strategy to manage its external account, is out of context

A chronic trade deficit forces us into economic contortions. One such is high interest rates to generate demand for the rupee, never mind that it permanently disadvantages exports and makes domestic production uncompetitive, versus imports. A new monetary policy announcement is due later this week. If the Reserve Bank of India increases base interest rates, it will be in line with its inflation targeting, rupee strengthening and external account stabilisation objectives.

High interest rates can kill our nascent economic recovery

The consequences for the domestic economy will be harshly adverse. Cheap money and a realistic exchange rate is what drove the Chinese juggernaut for years. Admittedly, it can also create bubbles. But private investment is at risk. The emerging political uncertainty and the yet to be completed corporate insolvency processes — affecting 15 per cent of bank assets — are investment dampners. Higher interest rates could well be the straw that breaks the donkey’s back. Public investment is always a poor substitute for private investment. It comes with the enormous risk of misallocating capital hugely, including for political ends.

A circle of wealth excluding the poor?

Political economy considerations also conspire to maintain the inward financial flows of “hot money”, which boosts stock market valuations. Over the last two months, foreign portfolio investors have sold a net amount of around $3 billion of Indian assets roiling our thin domestic stock and debt markets — eroding the wealth of 40 million equity holders. But it matters little for over 200 million other families, who continue to squirrel away their meagre savings into interest-bearing bank or post office savings accounts, or in gold.

Look beyond tax revenue to fund burgeoning expenditure

HAL

The Central government is constantly walking on a razor’s edge to achieve fiscal deficit targets – which is necessary to avoid stoking inflation. It is a tough call to choose between allowing oil spikes to pass through to consumer prices at the cost of stoking inflation and consumer anger, or to absorb the price increase within the general government finances, at the risk of blowing the fiscal deficit targets. The win-win solution is to find a source of additional non-debt financing, till the full benefits of GST kick in over the next five years. One option is to monetise the public investments made thus far in industrial entities, infrastructure and land.

Find a non-tax source to replace the cushion provided earlier by low oil prices

Ashok

During 2015-18, the government reduced the fiscal deficit by one per cent of GDP because of the availability of additional revenues of Rs 2 trillion from cheap oil. The government should target raising Rs 4 trillion over 2018-20 by monetising public assets, including the sale of equity in public sector undertakings. These capital inflows can help keep the fiscal deficit within three per cent of GDP. This is not easy. Embedded vested interests, which benefit from such investments, would create hurdles. Political capital will have to be spent.

Sell our “crown jewels” and monetise completed publicly financed projects 

NALCO

The disinvestment ministry was notionally empowered last year to discharge a limited mandate with respect to managing government equity in PSUs. But disinvestment remains a programme of simply selling government equity, when the stock market is high, to plug the fiscal hole and keep the fiscal deficit in check. 2017-18 was a landmark year. The government sold equity worth Rs 1 trillion due to very adroit management and with help from deep-pocket publicly-owned entities like ONGC, which bought into HPCL and other institutional investors who generated the demand pull. This was a one-off. The target this year is 20 per cent less at Rs 800 billion.

Air India is a high-profile disinvestment, which can stem the annual loss borne by the government. The 2016-17 loss was Rs 58 billion. Not enough to break the budget but unnecessary, and hence wasteful. No bids were received for it. Blame the flight of international capital to “risk-free” investments. Blame our fragile domestic political environment prior to the general election. But also blame low appetite within the administrative departments to let go of the PSUs that they control.

Don’t mimic the UPA – discipline departments which fight to retain PSU assets 

Air India

It is astonishing how quickly political capital can fade. Prime Minister Narendra Modi’s signature theme was that his writ runs in the Central government. But the foot-dragging in the Air India disinvestment case seems to illustrate that this might have changed. Admittedly, Air India is an iconic brand. For long, you felt you were home once you boarded Air India — remember that familiar smell of curry? Selling it, specially to a foreign investor, is like the British selling Jaguar-Land Rover to the Tata Group. Pragmatic but heart rending. We have yet to become business-like about our crown jewels, as the British have. We sell our assets past their expiry dates and then wonder why we got peanuts.

Focus, diligence and smart choices can make a difference

Success in navigating through this perfect storm will depend on avoiding the bureaucratic gut instinct for “tax terrorism”; monetising public assets in mission mode; monitoring expenditure closely and ensuring fiscal discipline, while absorbing the oil price increase and providing for higher farm gate prices — two politically inescapable imperatives. If the finance minister is lucky, oil prices will subside; America’s tempestuous and unpredictable President will lapse into hubris and the domestic political landscape will change for the better. But don’t wait for it to happen.

Adapted from the authors opinion piece in The Asian Age, June 6, 2018 http://www.asianage.com/opinion/columnists/060618/a-fiscal-storm-looms-dont-wait-for-godot.html

Don’t demonise air travel

 

solar plane

Solar Impulse 2 touches down in Spain completing a historic trans Atlantic flight. photo credit: dispatch.com

Air India recently made headlines by offering last-minute unsold seats at the price of AC rail tickets. It makes a lot of business sense for the national carrier: every marginal rupee it earns adds to its bottom line. More important, the fact that its bottom line is attracting leadership-level eyeballs is welcome for a state-owned company that budgeted for government support of Rs 19,900 crores over the 2012-16 period.

This new initiative could bomb if it makes regular air travelers, who are time flexible,wait till the last minute to book tickets. This would squeeze revenues further. But if it induces rail travelers to fly instead, it will be a win-win. This is a calculated risk that must be tested. What is more significant is that it signals the Maharaja’s changed can-do business-oriented approach.

air india2

Disruptive pricing or funded wars for market-share

Disruptive price innovation in passenger travel as a whole is a welcome move to squeeze out hidden value. This should be distinguished from the price war unleashed by private low-cost airlines a decade ago, and again in 2014, to gain market share within aviation. As the e-commerce market has found, funding losses to push out the competition quickly reaches the endpoint. Air India, a full-service airline, unlike some private carriers which levy hidden costs for baggage, seat allocation and food, should be encouraged to go further and explore all commercial options for expanding the air travel pie. Pulling away rail travelers, willing to pay AC fares, to fly instead is a good one.

Less than one per cent or 60 million inter-city travelers choose to fly. For most, the higher cost is the barrier. But for significant numbers easy connectivity is also an issue. Civil aviation is the neglected child of the ersatz socialism we have long practised. So deep is the association of private enterprise and markets with the rich that even this government, with its massive mandate, has to battle populist urges to stay on course with its reform agenda.

The socialist bias against air travel

Till just two years back, the thought of air travel competing with trains was a fantasy. Seen through the binary vision of poor versus non-poor, air travel is a luxury used mostly by the non-poor. Imposing penal taxes on air travel is therefore only a natural corollary of this bias.

The good news is that such mindsets are changing. The Union government has worked quietly but effectively since 2014 to convince state governments not to levy penal taxes on air turbine fuel, which cripple expansion of this sector. The fuel cost is 50 per cent of an airline’s total costs. State governments earlier saw air travel as a cash cow and levied VAT at penal rates of up to 29 per cent.

Government intervenes to correct the tax disincentives

But now several states, most affected by poor connectivity, wisely responded to the Union government’s efforts to de-demonise air travel. Orissa, Madhya Pradesh, Chhattisgarh, Jharkhand and West Bengal slashed VAT to nominal levels in late 2014. Even CPI(M)-ruled Tripura was persuaded to reduce VAT to 18 per cent. Around 50 per cent of air traffic today and the bulk of profits are from flights linking the seven large metros. The need for better regional connectivity is obvious in a country of India’s size, that is also saddled with our dodgy surface transport infrastructure. Travelling from Kanyakumari, on the Indian Ocean, to Jammu, just below the Himalayas, or from Dwarka, on the Arabian Sea,K to Dibrugarh in Assam takes at least three days by train and even longer by road.

The Centre has launched a parallel scheme to improve air connectivity by creating a special fund to finance the gap in financial viability for linking Tier-2 and Tier-3 cities by air. There are around 50 of these. The pity is that this initiative is seen as fulfilling a social objective. This is an effective way to kill the long-term sustainability of air operations on these routes.

Regional air travel a wooly “social” objective  or just good economics?

Regional connectivity shouldn’t be branded as a populist goody. Air connectivity drives and contributes to growth and decent jobs. Globally, every job created directly in civil aviation leads to an additional six jobs indirectly. Only a link with growth will induce serious air operators to see the proposed subsidy as an initial sweetener rather than a perpetual crutch. Faster and better passenger trains are an option too. But it will take at least two decades to build upgraded rail tracks and the appropriate rolling stock. Our fastest passenger trains run at an average speed of only 80 km/hour. High-speed trains of the type envisaged between Mumbai and Ahmedabad and later between New Delhi and Varanasi can be viable only on high-density routes. These also cost a packet. The intrepid Elon Musk of the SpaceX rocket venture; Tesla Solar Wall and automated electric car, envisages a disruptive technology – travel by Hyperloop — an elevated tube mounted on pylons with passenger pods pushed through at hyper-speeds using electro-magnetic waves.

hyper loophyper loop2

The ball park estimate is a capital cost at $6 billion, just a fraction of the $68 billion, planned to be spent on the high-speed rail link between Los Angeles and San Francisco. Musk concedes that beyond 1,500 km, air travel would still be cheaper.But this innovation in transportation is yet to be piloted and tested. Commercialization is unlikely before 2030 though Musk is pushing for 2020.

Air travel also more safe and easy to secure than surface transport

In lightly-policed countries like ours, the security and safety of ultra high-speed inter-city passenger trains is a matter of some concern. Air travel is more difficult to cripple and offers higher security levels as it is off the ground. It is suitable for connecting urban growth hubs at distances beyond 500 km under our “enclaved pattern” of development

The Maharaja has kicked-off its strategy to meet the competition in a fiscally sustainable and affordable manner. More power to the elbow of the civil aviation leadership to grow the pie of the air travel business.

air india

Adapted from the authors article in the Asian Age, July 18, 2016 http://www.asianage.com/columnists/incentivise-air-travel-new-links-will-boost-growth-825

 

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