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India’s Big Government

Page 7

by Vivek Kaul


  But, more than two years down the line, this doesn’t seem to be the case. Over the years, there seems to have been a general reluctance on the part of the government to privatise public sector units, i.e., sell out on them, lock, stock and barrel.

  In fact, genuine privatisation (where the government sells out a substantial share of the company and does not continue to manage it; this is referred to as strategic sale in government terminology) has generated very little revenue for the government over the years.

  It is worth pointing out here that, of the total of the Rs. 1.9 lakh crore revenue that the government had generated through the disinvestment route between 1991 and late 2015, only Rs. 6,344 crore has come through the strategic sale of equity. And this happened between 1999 and 2004, when Atal Bihari Vajpayee was Prime Minister and Arun Shourie the Disinvestment Minister.59

  I think another major reason that only minor genuine privatisation seems to have taken place lies in the fact that every government has to accommodate many leaders as ministers. This has especially been true since the 1990s, when coalition governments became the norm in India.

  After all, how good is a minister with no public sector enterprises under him? Take the case of the Civil Aviation Minister. How much value would he have with Air India not continuing to be government owned? Or how much value would the Telecom Minister have without MTNL and BSNL, the two government-owned telecom companies?

  Ministers are known to use the public sector enterprises for their personal use. An excellent example of this is how Dayanidhi Maran of the DMK party milked the Telecom Ministry when he headed it. Hence, understandably, there is a resistance at the level of the ministers in the government as well as bureaucrats to the entire idea of genuine privatisation. While Modi’s government is also a coalition government, the BJP has the numbers to run the government on its own. Hence, it is not really dependent on its coalition partners, unlike almost every government before it was since 1989.

  Furthermore, there is always the fear of employee trade unions, which tend to punch much above their weight. As the Economic Survey of 2015-2016 points out: “In many cases where public sector firms need to be privatised, the problems of exit arise because of opposition from existing managers’ or employees’ interests.”

  This explains why the government continues to run loss-incurring public sector enterprises when it should be concentrating on so many other things that need its more immediate attention.

  ****

  There is one particular company which I would like to discuss in some detail, and that is Air India. There are some businesses that the government should simply stay out of. The airline business is one such business. As the legendary investor Warren Buffett put it:60

  The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit [emphasis added], attracted by growth when they should have been repelled by it.

  And a bottomless pit is what Air India has turned out to be. The accumulated losses of Air India between 2010-2011 and 2015-2016 amount to Rs. 34,690 crore (see Figure 2.2). Every year, to keep the airline going, the government has to pour more money into it.

  Figure 2.2: Losses of Air India between 2010-2011 and 2015-2016 (in Rs. crore).

  Source: Public Sector Enterprises Surveys; and Ministry of Civil Aviation.

  In fact, in 2015-2016, the airline suffered a net loss of Rs. 2,636 crore even though it made an operating profit of Rs. 8 crore. The Minister of Civil Aviation, Ashok Gajpathi Raju, said in the Lok Sabha in early May 2016 that the airline was able to cut operational expenses by almost 11 per cent during the course of the year, and hence, run an operational profit.

  Anyone who has studied the basics of finance knows that operational profit and net profit are two entirely different things altogether. Operational profit is the profit that a company makes from its business operations. After this, the company needs to pay interest on its debts as well as taxes to the government. What remains is the net profit.

  Given the loss of Rs. 2,636 crore, the government would have had to pour money into Air India in 2015-2016, like it had in the previous years as well. In fact, until March 2016, the government had already poured Rs. 22,280 crore into Air India. For 2016-2017, an equity infusion of Rs. 1,713 crore has already been approved.

  The question to ask is how the airline managed to bring down its losses to Rs. 2,636 crore in 2015-2016 from Rs. 5,860 crore in 2014-2015. Take a look at Figure 2.3.

  Figure 2.3: Revenue and expenditure of Air India between 2012-2013 and 2015-2016 (in Rs. crore).

  Source: A written answer provided by Mahesh Sharma, the then Minister of State for Civil Aviation, to the Lok Sabha on April 28, 2016.

  The Civil Aviation Minister wanted us to believe that operational efficiencies were at work and that these helped Air India turn in a better performance. But was that really the case?

  As can be seen from Figure 2.3, the total revenue of Air India has been growing at a very slow pace since 2012. In fact, between 2014-2015 and 2015-2016, the airline managed to increase its sales by just 3.4 per cent.

  This isn’t surprising, given that it continues to lose its market share. In 2013-2014, Air India had a domestic market share of 19 per cent. Since then, it has fallen to 16 per cent (as of February 2016). The airline continues to have a brand image problem and is the airline of preference of very few people.

  That apart, the airline has managed to bring down its expenditure by 9.5 per cent, or by Rs. 2,515 crore, between 2014-2015 and 2015-2016. The question is: How has this happened? The simple answer to this lies in the fact that jet fuel prices have fallen during the course of the financial year 2015-2016 and the airline has benefited tremendously because of this.

  In May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower, at $ 0.93 per gallon, in January 2016. Hence, lower jet fuel prices helped the airline bring down its losses.

  Furthermore, a March 2016 newsreport quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs. 5,700 crore, which would be significantly lower in comparison to the Rs. 8,200 crore bill that the company ran up in 2014-2015.61

  What does this mean? The company saved Rs. 2,500 crore because of lower fuel costs. And how much did the total expenditure of the airline fall by? Rs. 2,515 crore, as mentioned earlier.

  Hence, the expenditure of the airline has fallen primarily because of lower fuel prices. And this has helped the airline to lower its net losses and at the same time make an operational profit. The figures make me wonder: What operational efficiency was the Civil Aviation Minister talking about?

  Furthermore, lower fuel prices are not within the control of the airline. As soon as prices start to go up, the airline’s losses will start to increase as well and its meagre operational profit will turn into a loss.

  In a reply to the Lok Sabha, the then Minister of State for Civil Aviation, Mahesh Sharma, offered a range of reasons as to why Air India incurs losses. High fuel price was one reason. But this impacts all airlines and not just Air India. If high fuel prices were an issue, how did Indigo (a low-cost airline) make profits all these years? Furthermore, this cannot be a reason for 2015-2016, when jet fuel prices fell dramatically.

  Sharma also offered other reasons for the non-performance of the airline. One reason offered was the high airport usage charges. These charges are not just borne by Air India. Other airlines shell out for these as well, which, in turn, are recovered from the end consumer.

  Sharma then said that com
petition from low-cost carriers is another reason why the airline is losing money. But this is true for all other airlines which are operating in the market. The competition is not just specific to Air India.

  Sharma, in his reply, also blamed the weakening of the Indian rupee for the extreme losses suffered by Air India. Jet fuel has to be imported, and if the rupee weakens against the dollar, the cost of jet fuel also goes up. Nevertheless, this is a risk faced by every airline in the world which does not earn a major portion of its revenue in dollars and which has to buy jet fuel priced in dollars (i.e., import it). If the local currency depreciates (i.e., loses value) against the dollar, jet fuel is bound to get expensive. Hence, the risk is not just specific to Air India. Also, there are ways an airline can go about hedging these risks.

  One genuine reason which Sharma offered was the high interest burden of the airline. As on March 31, 2015, the airline already had a debt of Rs. 51,367 crore.

  The point is that Sharma came up with many reasons, except for the fact that the government does not know how to run an airline. Should a government be running an airline in the first place? It is a difficult business to be in, as even Warren Buffett has admitted. Nevertheless, if the government can make condoms, it can surely run an airline, can’t it?

  And honestly, any other minister in his place would have come up with the same set of excuses. The fact of the matter is that a civil aviation minister without Air India coming under him would essentially be useless.

  In fact, like in the case with BSNL, a similar reasoning is offered in order to keep Air India going. The private airlines don’t like to service non-profitable routes. Fair enough! Then the government does not need to run an airline as big as Air India. It can cut down on its services and try running a smaller airline on the routes which are not well connected by private airlines because they are not profitable.

  In this case, even if there are losses, they would be limited, and the government would fulfil its social obligations. It beats me, though, as to how running an airline is a social obligation.

  Lastly, the Rs. 8 crore operational profit that the airline has made during 2015-2016 will be used as a vindication to show the revival of the airline and an excuse to keep it running. Nevertheless, as soon as fuel prices start to go up, the losses will definitely increase. The taxpayer will continue to bail out the airline.

  Be rest assured of that!

  ii Source: http://coal.nic.in/content/coal-reserves.

  iii BSNL seems to have done a little better in 2015-2016. At the time of writing this, statements made by the Telecom Minister and the Prime Minister suggest that the company made an operating profit during the course of the year.

  3. PERFECT IS THE ENEMY OF GOOD

  Padhna likhna seekho, o mehnat karne waalo,

  Padhna likhna seekho, o bhook se marne waalo.

  – SAFDAR HASHMI

  The Nehru-Mahalanobis model of economic growth depended largely on grandiose public sector enterprises to get the Indian economy going. Nehru even called these companies ‘temples of modern India’.

  Nevertheless, these temples of modern India created other major problems for the Indian economy. They led to a lack of focus on primary education and the creation of a huge black economy as well as crony capitalism.

  In this chapter, we shall deal with the lack of focus on primary education. The public sector enterprises that the Nehru-Mahalanobis model envisaged needed skilled and trained personnel. As Mahalanobis said in a speech he made in November 1954: “In dealing with the programme of industrial production, one of the most important questions would be an adequate supply of trained personnel at all levels. This may indeed prove to be a serious bottleneck.”62

  This speech was made in the presence of Nehru at the Indian Statistical Institute in Calcutta (now Kolkata). With this started the Indian focus on higher education at the cost of primary education. Instead of investing in primary education, India decided to use its education budget to churn out specialised personnel who could execute and manage grandiose public sector projects. This was primarily because of the Mahalanobis model.63 This led to the country ending up building a few world-class institutions, like the IITs and the IIMs, at the cost of ignoring basic school education for its citizens.

  This focus on higher education essentially ensured that primary education was ignored and that Nehru continued where the British had left off. Take a look at Table 3.1, which shows the rate of literacy since 1951.

  Table 3.1: Literacy rate over the decades since Independence.

  Source: http://censusindia.gov.in/2011-prov results/data_files/india/Final_PPT_2011_chapter6.pdf.

  In 1951, four years after the British had left India, the literacy rate was a mere 18.3 per cent. In the case of women, it was less than 10 per cent. As Jean Drèze and Amartya Sen write in An Uncertain Glory:64

  The classic problem of school education in India has been underfunding by the state. This was, of course, the case in British India right up to India’s Independence (when the British left India, more than four-fifths of Indians had not been touched by schooling), but it was followed by public policies of the newly independent India, which continued gross underfunding despite rousing rhetoric claiming exactly the contrary, with such slogans as ‘Education is our first priority’.

  Since 1991, an individual aged seven years or more is considered to be literate if he or she can read as well as write with understanding in any language. Hence, all children less than seven years of age are essentially considered illiterate when the rate of literacy is calculated. Before 1991, the literacy rate was calculated by taking the entire population into account. This literacy rate which takes the whole population into account is referred to as the crude literacy rate. Take a look at Table 3.2, which shows the crude literacy rate of India since 1901.

  Table 3.2: Crude literacy rate over the past century.

  Source: http://censusindia.gov.in/2011-prov-results/data_files/india/Final_PPT_2011_chapter6.pdf.

  The table clearly shows the abysmal state that Indian education was in during the British Raj. While the British might have established a few big universities, that was primarily to produce enough English-speaking babus who could help them govern and plunder India.

  Another factor that comes out very clearly from the table is that India’s crude literacy rate has improved since Independence. The crude literacy rate as per the 2011 census was 64.3 per cent. The literacy rate (or what is also known as the effective literacy rate) was 74 per cent.

  While this sounds impressive, it clearly is not. For one, even close to seven decades after Independence, more than one-fourth of Indians continue to be illiterate. In the case of women, more than one-third of women still continue to be illiterate. And this can’t possibly be a good thing.

  Furthermore, the effective literacy rate and the crude literacy rate do not take into account the number of years an individual spends in school. The Human Development Report (2015) points out that an average Indian spends 5.4 years in school. While an Indian woman spends 3.6 years in school, an Indian man spends 7.2 years in school, on an average.

  The 12th Five-Year Plan (2012-2017), which is a slightly older document, puts the mean number of years of schooling in India at 5.12 years, which is not very far off from the Human Development Report figure. This is well below other emerging-market countries, like China, at 8.17 years, and Brazil, at 7.54 years. In fact, it is also well below the average of all developing countries, which is at 7.09 years.

  There are multiple reasons for this. This is a big issue and can be dealt with in detail only in a focused book on the issue. Nevertheless, here are some of the reasons.

  ****

  The availability of teachers is a huge issue when it comes to imparting primary education. In fact, the Public Report on Basic Education (PROBE) in India released in 1999 summarised the situation of primary education in India very well.65 The study was carried out primarily in Northern India, in the states of Bihar, Uttar Prades
h, Madhya Pradesh, Rajasthan and Himachal Pradesh.

  One of the main findings of PROBE was that: “Many teachers indulge in various degrees of sustained absenteeism. In two-teacher schools, for instance, it is not uncommon for teachers to take turns in attending. And in one-third of all the schools covered by the PROBE survey, the headmaster was absent at the time of the investigators’ visit.”66

  The average government school, it was found, remains closed for 12 weeks during a year on account of annual vacations. After accounting for Sundays and Saturdays (when most of the schools have a half-day), the school remains open for around 220 days in a year.

  So does that mean that students are taught for 220 days in a year? Not really. Twenty days have to be deducted for the leave that teachers are permitted to take. Another 20 days are to be deducted for the closure of school during heavy rains.

  After accounting for this, around 180 days remain. So does that mean that students are taught for 180 days in a year, i.e., at least for half a year? Again, not really. Another 12 days have to be deducted for non-teaching duties, like census-related assignments and election duty. About nine days a year have to be deducted for the collection of salary, and a further nine days for the distribution of incentives like food rations and free textbooks.

  So we are down to 150 days, without taking into account strikes, other administrative tasks and days on which teachers cannot attend school because they have a training programme to attend. We also haven’t got around to taking the casual absenteeism of teachers into account as well.

  The teacher is supposed to teach for six hours every day. But coming late and leaving early seems to be the norm. In fact, in many cases, the school simply does not reconvene after the lunch break.

  This basically means that on most days, an average teacher spends around four hours in school on an average working day. Also, PROBE found that half of the teachers do not carry out any teaching activity even when they are in school. This basically means that the average teaching at school is limited to two hours a day for 150 days in a year.

 

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