Thursday, August 6, 2009

Air India, Infrastructure Policies & Newton's Apple

Our infrastructure policies need a paradigm shift to reflect reality

We need a completely different approach to developing infrastructure. It is not enough to state what we want and allocate funds. For the Old Guard, who see aspirational statements with budgetary allocations as the panacea, to comprehend this requires a true paradigm shift, as with Newton and the apple. A new social paradigm, as it were, so that we learn to set realistic goals, make practicable work plans, then execute them.

This applies to first-order infrastructure, such as energy, transport, and communications, as also to second-order infrastructure that we lack, or where processes need rationalisation, as in selling agricultural produce across the country, or getting aviation fuel at the same price everywhere. These second-order elements are: (a) organised markets — as integrated, end-to-end chains — from input and production, to transportation and storage, to marketing and distribution, including all taxation, and (b) finance, including insurance.

The present crisis in air transportation illustrates the problems with our business-as-usual approach to:

  • Governance: often feudal, eg, politicians controlling sectors as though they were baronial fiefs, to do with as they like, and
  • Citizenship: either feudal (servile), or overly liberal, or merely argumentative (ie, the spoilers).
  • This is why governments and stakeholders — all citizens — must strive to work out a radically different approach. This is true for all forms of infrastructure, including the disarray in energy, communications and the railways.

    Air Transport As Infrastructure

    The skills we must learn and apply are collaboration; realistic goal definition; detailed, practicable activity planning; and high-quality execution, including linkages in overlapping areas or jurisdictions that have to be resolved, so everything dovetails and converges to produce the desired results. For instance, take transport, an aspect of infrastructure that includes civil aviation, and consider one factor: the handling of aviation turbine fuel (ATF). A little reflection should suffice to convince sceptics that airlines are an integral part of transportation infrastructure, and are of strategic importance to the economy. If the central government decides ATF must be available at a uniform price countrywide, the states need to amend sales tax regulations accordingly, so that airlines get the benefit of a standard, reasonable (by international standards) excise rate; if a Goods & Services Tax is introduced, ATF must be covered. This is because airlines must be nurtured as an essential aspect of transportation. Every step has to be seen to completion, and all steps have to be completed. Only then can we expect good results.

    Airlines Crisis

    To the discerning, it was obvious years ago that the airline sector in India was hurtling towards chaos. An article in 2005* spelt out the inevitable downward spiral of an unrestricted ‘open skies’ approach, well before the global crisis of 2008. By that time, the erstwhile Indian Airlines, deprived of timely funding and all that it implies in terms of management, systems and people, had shrunk from its dominant market position to 38 per cent, while being forced to serve less remunerative routes. Subsequent developments were even more disastrous, namely, Air India’s giving up its bilateral rights in lucrative sectors like the Gulf, the merger with the domestic airline without the attendant benefits of rationalised systems, high personnel costs, plummeting revenues, the overeager rush of private airlines to exploit forced access without the encumbrances that our public sector airlines have to suffer, and finally the petroleum price rise and economic crisis.

    We need to approach infrastructure very differently from other capital-intensive, cyclical sectors or industries, because it has significant cost and productivity effects across the economy. This is true for aviation as well, as it facilitates activity and productivity across many sectors. Without its enabling capacity, the rest of the economy is hamstrung. Especially because of the poor state of India’s infrastructure, ignoring this results in disproportional negative effects on other sectors.

    Somehow, these fundamental truths remain unaddressed in our quest for solutions for Air India and the airlines sector. The first requirement of policymaking is anchoring in this reality. The second, equally critical requirement is defining goals that are realistic and coherent. Without these two steps, this sector will continue to flounder.

    There are those who advocate a totally free market approach instead. They seem unaware that even developed industrial economies with market systems and processes that serve as a platform for the luxury of such beliefs have had to revisit these notions. Developing India can ill-afford the inequitable, discordant, turbulence-creating forces of unbridled individualism, libertarianism or capitalism. India has never had the benefit of appropriate organisation and systems as a democratic, developing nation, but this is something we have to institute, through balanced polices, regulations and institutions. Those who think otherwise need only glance at the economic history of other nations to appreciate how much governments have intervened in building their markets and economies, and how widespread affluence came only after this contributed to a rise in living standards for entire societies.**

    Airlines are an integral aspect of our infrastructure, and deserve the strategic thinking and effort that should go into developing all infrastructure. Air India is a part of this sector. This is why attempts to revamp Air India with only a quick financial restructuring plan and inducting corporate leaders without airline expertise into the board appear superficial and pointless (costing Rs 20,000 crore, according to one estimate).

    Efforts to build Air India are likely to succeed only after comprehensive restructuring of the airline as well as the sector as a whole. There needs to be a consideration of the long-term possibility of nurturing domestic manufacturing in aviation, as well. Unless airline policies worldwide develop on the lines of shipping conferences supported by Japan, China and Singapore, ongoing turbulence is inevitable. AI needs an alliance to induct expertise in operations; it also needs control over its cost structure. These should be possible with part-ownership by the government, perhaps with even a buyout by employees and management, if feasible.


    ‘Competition, Open Skies… and Bust?’, BS August 4, 2005:

    ** ‘The Caged Phoenix: Can India Fly?’, Dipankar Gupta, Penguin Books, 2009. See: