Thursday, May 24, 2012

Should the Government of India Bailout Air India


This is probably the most discussed topics in social and economic forums in India including the Indian Parliament. Recently the Government of India has announced a bailout package worth 30,000 crores of rupees over the next 9 years which begins with an immediate bailout package of Rs. 6,750 crores. This article is going to be my take on “Should the Government of India bailout Air India” from its current financial mess…

About Air India

Air India is India’s National Carrier and this is something you know already. If you read my previous article on “What is wrong with Air India” you would also know that Air India is in dire financial situation. Poor Management Decisions, with careless staff performance and inferior customer service, India’s National Carrier is on the verge of a painful collapse. We also covered in great detail about some of the reasons which I feel have contributed to Air India’s current state of affairs.

What is a Bailout?

Do you know what a Bailout is? The first article in my blog was about this. A bailout in economic parlance is a financial aid that helps someone or some organization prevent declaring bankruptcy.

Government of India’s Bailout package for Air India in 2012

Last month, the Government of India has announced a bailout package worth 30,000 crores over the next 9 years. There will be an immediate cash influx of 6,750 crores which Air India is going to utilize for its day to day working capital cash requirements.
30,000 CRORES – A lottt of money – Isn’t it??

Is this the first Bailout Package received by Air India?

Do you want to make a blind guess and say “I don’t think so”???

If you did, you were 100% correct my friend. This is not the first and most probably not the last bailout package the ailing Indian National Carrier from the Government of India.

Actually speaking – this is the 4th bailout package that Air India is receiving from the Indian Government. The details are:
1. In 2009 the Government Injected Rs. 5500 Crores to keep the airline flying. This was the first bailout
2. In February 2010, the Government funded around 2000 crores
3. In August 2011 the Government gave another 1200 crores to help Air India meet its cash requirements
4. Now in 2012, it has approved an additional 30,000 crores of which 6750 crores will be given immediately

What is the Justification for this Bailout?

The Proposed Justifications on the part of both Air India & the Indian Government for this massive bailout package are:
1. To Meet its working capital requirements
2. To Improve Safety Features & Requirements in all its fleet aircrafts
3. To Increase the airlines on-time performance to 90% (It is 71% now which is one of the lowest in the world)
4. To purchase new aircrafts (Boeing Dreamliner’s)
They claim that, with all this capital infusion and radical management strategies, Air India will become a profit making entity by the year 2018.

Where does this Bailout Money come from?

Where else – From our Taxes. The Tax Money paid by the citizens of India is being spent to bailout Air India.

Do I think this Bailout is going to work?

From my Heart I want this Bailout to work. Air India performing in such a poor manner hurts the image of India across the globe.
From my Brain – I don’t think that this Bailout will work.

Reasons:
1. The Management is not going to mend its erroneous ways
2. The Staff is not going to mend its careless ways
3. The Government is going to continue to bailout Air India no matter how poorly they perform

Do I need to say more???

Should the Government Bailout Air India?

NOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Definitely NOT. Why must the government spend the tax payer’s money on a lost cause? Does this bailout package include any performance based clauses? Will the government pull the plug if Air India is going to continue to make losses? Of course not. So, as long as they are going to get paid their salaries & get bailouts every one or two years to cover for their losses, I don’t think the Air India Management will even take half-hearted steps to revive the airline.

What can the Government Do to Fix the Situation?

Well, this one is easy. The government can do either or all of the below:
1. Sell the Airline to a Private Player – This means a private company is going to own the airline and unless the management & staff of Air India are going to mend their erroneous ways, the new owner is going to kick their rear ends to get them to work. If I were to invest thousands of Crores to buy this airline, will I allow the staff to be as lethargic and careless towards customers as they are now?
2. Tighten the Noose around the Top Management of Air India – The Government must set performance targets and guidelines which must be like – Increase Operating Profit for 10% in the next 12 months, Increase Customer Satisfaction index to at least 6 out of 10 in the next 12 months and so on… If you cannot meet all these targets in the next 18 months (with a buffer of 6 months) we will sell the airline to a private player or shutdown the services. None of you will have your jobs if you fail to perform.

This sounds pretty harsh but unfortunately spending thousands of crores of public money on the airline which is continuing to perform poorly is a waste of time and this money could rather be spent on useful causes to help the common man who is paying this tax money

Hope things take a turn for the better in Air India!!!

10 comments:

  1. Hi Anand,
    .
    Once again, I agree with this post. I don't think it's prudent for any govt to bail-out any private or public entity. If some company goes under water, it deserves to be liquidated so other organic growth can happen to take its place.
    .
    "Where else – From our Income Tax" - I don't disagree - but that statement is misleading. Income tax does not form a major part of the revenue stream that the govt receives. I used to lament along the same lines that it's my (okay, our) income tax that they're draining out.
    .
    Here is the PDF from the NIC website,
    http://indiabudget.nic.in/ub2012-13/rec/tr.pdf
    .
    Total-Corporation Tax 298687.89 (2010-11)
    Total-Taxes on Income 146586.54 (2010-11)
    Total-Service Tax 71015.87 (2010-11)
    Total-Tax Revenue 793071.72 (2010-11)
    .
    Our Income tax is 1.45 out of a total of 7.93 revenue GoI makes. I believe the largest item in the revenue is the Corporation-tax - 2.98.
    .
    Point to note: If corporations were not taxed they way they are (I think its 30% of profits), there is a chance that the monies will flow back to the economy [corporations may invest, they may create subsidiaries, they may give huge bonuses to top executives who then spend it or save it or invest it, heck may be - JUST *MAY BE* they even give bonuses to each employee).
    .
    I found another wonderful blog post similar to this (albeit on the Kingfisher bail-out) at "kaipullai.com" Link: "http://kaipullai.com/2011/11/28/the-curious-case-of-vijay-mallya-and-his-bailout-and-one-more-scam/"
    .
    It was nice reading a fellow-citizens thoughts which actually match my own. Thanks bunches.
    .
    Hope more & more citizens are able to see the blatant mistakes being committed & voice our opposition to these.
    .
    MN

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    Replies
    1. @ MN

      Thanks for pointing out. Yes, the point I was trying to make here is that the tax payer money (irrespective of whether it is income tax or corp tax or any other form of tax) is being wasted on this loss making entity.

      Also, I dont think Corporations are charged at 30% of their profits. Its much lesser than the taxation levels of citizens. Anyways I will gather info on that and probably write about taxation of corporations in India soon.

      Note: The article in kaipullai.com was exceptional. I am against the government bailing out a govt owned airline. Why would I support kingfishers bailout. Mr. Mallya has enough funds to spend on his IPL team, his F1 team, his calendar models and everything else. But, wants the government to help his airline because he thinks we are all idiots :) Thankfully our awesome politicos dint budge to his favor request and so kf airlines is still in supposed financial hardships because Mr. mallya doesnt want to spend money on it

      anand

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    2. And - I have edited that sentence to use the term Taxes instead of Income Tax...

      Delete
    3. Awesome, thank you.
      .
      At kaipullai's blog I read about how SBI & other banks are planning to fund the ever-losing Mallya enterprise. The levels of corruption in high govt offices & among bureaucrats is frequently brought into limelight - however the enormous levels of corruption in Corporations are seldom even mentioned. Banks, IT companies, every *big enterprise* has corruption.
      .
      If you happen to have friends at one of those *BIG Companies* - you may want to check the freebies that those in Facilities-Admin *may be getting* over the deals that they make with vendors for bus services, food services, security, et cetera. In my personal opinion, Corruption is rampant in almost all of these dealings. Of course, given, I do not have any proof whatsoever to back this up.
      .
      Personally, I blame this on "socialism". It is the concept that provides power to a small group of people to create laws & coerce all of the public to act in a certain manner for "greater good". Yesterday they forced public to not be homosexuals by having a law to jail such "unnatural* activity. Today, they force public to not use drugs (marijuana). Any activity or behavior forced on the public using coercion or threat of jail-time will back-fire in a long term. We need to educate individuals in the society so they learn about the dangers of using drugs & they voluntarily not use them. Use of force is unacceptable - unless there is direct violence involved [We cannot educate a terrorist with an AK 47 roaming the streets of Mumbai - there we have to use force; unfortunately, GoI prefers to spend crores & crores of tax-payer monies to provide impeccable security to a pig like Ajmal Kasab - again a consequence of socialism]
      .
      These again call for us to be acquainted with writers such as Ayn Rand, Ludwig von Mises & F.A. Hayek - the worldview espoused by these folks have such great value it is a tragedy that none of us in India are ever introduced to these personas during our school years.
      .
      MN

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    4. Using his influence on our politicos and their vulnerability to sops, Mallya wanted to enlist the governments help in restructuring his debt & even a possible bailout. But, other industrialists were vocal in their protest and once the negative reaction by the common public including the opposition parties fortunately put an end to it. Does Mallya have no money to spend on kf airlines? He has enough to fund an IPL team, an F1 team (This alone costs him atleast a few thousand crores a year). He runs an extremely profitable liquor business. Cant he divert funds form those profitable avenues into his ailing airline? Instead he wants the governments help. What a piece of joke...

      The problem is not socialism - the problem is the individual mentality. Can every indian vouch for the fact that, if he/she is made a politician or a government officer, they will not do anything to help themselves or their family and concentrate only on the public good? No. As long as they are students or anything other than a politician or a govt employee, they feel the other side is corrupt and incapable. They feel, they only care about earning money. Though that is true, when these people land up on the other side, they dont bother to fix the situation. Instead they become one among those corrupt folks and start making money at our expense. Unless we stop giving bribe, there is no way the other side is going to say No, dont give us money.

      Kasab - That guy must have been put to death the day he was captured. Only in India does all these things happen. We must seriously stop wasting tax payer money in taking care of such scum...

      Indian education system needs an overhaul. children must be taught what is right & what is wrong so that, atleast the next generation becomes responsible citizens

      Anand

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    5. Hi Anand,
      .
      On the one hand you seem to agree that socialism is the problem - while on the other you are stating it is not. Let me elaborate.
      .
      a) "their vulnerability to sops" - You mean the greed to accept bribe is a "vulnerability"?
      .
      b) "The problem is not socialism - the problem is the individual mentality" - Let's see.
      .
      c) "Can every indian vouch .... the public good? No" - So the problem is not "individual mentality" when you argue that all of our junta will have the same mentality. Power corrupts - absolute power absolutely corrupts. The more we try to have central planning & centralized monetary system - the more are the chances that a few elite-rich pigs will game the system. The problem is not one or 2 individuals of all of the people - it is *THE SYSTEM*. And within that system, the concepts/ ideologies that allow us to collect mandatory taxes from every individual for the greater public good - *that concept* is the problem. And that is precisely Socialism.
      .
      d) "Though that is true, ... money at our expense" - Again, you are reiterating that it is the *going to the other side* that corrupts otherwise normal people into greedy-power-and-money-hungry savages. Couldn't agree more - that precisely means *THE SYSTEM* is the problem; not the people.
      .
      e) "Kasab - That guy ... such scum" - This is not a one-time rare scenario. And it is not specific to India either. Google "Ramzi Yousef" - that guy is in a federal penitentiary; paid-for & take-care-of by honest, hard-working Americans. Why should good people pay taxes so that bad people be fed, housed, clothed & kept behind bars? There is a moral hazard here - an unintended consequence; we are punishing good people by forcing them to pay taxes and we are providing food, clothes & shelter to bad people.
      .
      I am not kidding here. Look up this link (it is a CALIFORNIA GOVERNMENT website): "http://www.lao.ca.gov/laoapp/laomenus/sections/crim_justice/6_cj_inmatecost.aspx?catid=3" - that is CORRECT. It costs almost USD 50,000 a year - which is more than what I make working as an IT Programmer here in the US (I'm counting only my take-home salary which is gross minus income tax).
      .
      This, again, is a direct result of SOCIALISM - the ideology that justifies coercion, extortion & various other anti-liberty activities in the name of greater good.
      .
      In conclusion, my opinion is that, Indians are no different than individuals in various other nations. A majority of the people in the world want to mind their own business & live a good, happy, healthy life without causing problems to others. It is not the place of a central govt to discriminate, coerce, extort & abuse any individual. SOCIALISM is the concept, it is the ideology that empowers the corrupt elite-rich few to make laws to extort all other citizens. And like you said, even if a poor or middle-class person gets the power that SOCIALISM offers - he / she too will be corrupted.
      .
      To end my rather lengthy diatribe, a credo worth repetition,
      POWER CORRUPTS - ABSOLUTE POWER ABSOLUTELY CORRUPTS.
      .
      Thanks!
      MN

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    6. Cant Agree More :) Everything you said is 100% true and I too feel the same way about things. Unfortunately there is not much we can do apart from hoping for better things to come in future. Lets hope for the best

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    7. Thank you for sharing my perspective. We could spread the message - the message of liberty, the message of freedom. Socialism has been the core reason for many of the corrupt activities taking place (& not just in India). While in an utopia all the people accountable for "public money" are reincarnations of God Himself, in our real world that is not the case - it never was, it is not now & it never will be so.
      .
      Once again, many thanks. Hope to read a post from you on your thoughts about Business Cycle, Austrian School, Ludwig von Mises - and hopefully Ayn Rand too (even though her field does not overlap with what you usually pen in your blog).
      .
      Thanks!
      NARAYAN M

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  2. Why doesnt the government let Air India go bankrupt???

    ReplyDelete
    Replies
    1. Because - It is owned by the Government and Air India flying means a lot of respect and prestige for the Country. As a result they are trying everything to keep Air India Flying while the staff & management of Air India are using this to their advantage and having fun at the expense of the tax payers

      Delete

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