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.

                                                           shyamponappa@gmail.com

* ‘Competition, Open Skies… and Bust?’, BS August 4, 2005: http://organizing-india.blogspot.com/2008/04/competition-open-skies-and-bust.html

** ‘The Caged Phoenix: Can India Fly?’, Dipankar Gupta, Penguin Books, 2009. See: http://www.civilsocietyonline.com/jun09/jun0913.asp

Ambivalence Adds To Uncertainty

Shyam Ponappa / New Delhi November 06, 2008

We need decisive action on credit and interest rates.

The rate cuts together with steps like the RBI giving enterprises access to foreign exchange are welcome initial steps. They are too tentative, however, and more urgent action is required.

The present developments are like a less severe precursor. After a total loss of economic momentum, remedial actions will have less effect. The economy is staggering under a liquidity crisis from inappropriate tightening and high interest rates, leading to stalled projects and spending, with businesses floundering on the brink of distress sales, bankruptcy and layoffs. How can India’s domestic market-driven economy with its fundamentally sound banks be revived?

Simple Arithmetic

The logic is simple: banks lend to enterprises only when they see profits and expect to recover loans. Profits have tanked, and must be revived. Profits will rise with adequate liquidity, low interest rates and strong disincentives not to lend (ie, a low reverse-repo rate — which banks earn for deposits with the RBI), together with rationalized taxes as for ATF for aircraft provided revenues can be maintained.† Revenues will sustain and grow only if there is confidence; otherwise, there will be no spending. Hence the urgency for the government to orchestrate its actions with the RBI, banks, businesses and industries, to apply a concerted strategy for building profits.

At present, the strength of our economy built in the good years in healthcare and pharmaceuticals, airlines, hotels, banks and financial services, metals and manufacturing…is being squandered in battling a recessionary spiral. What’s worse, that spiral was induced and is now aggravated by self-inflicted high funding costs (global rates are lower) and tight credit. This is why enterprises sought external borrowings, and are now suffering with the depreciation of the rupee.

Reversing The Downward Spiral

The negative trend can be reversed by addressing four drivers of the present economic crisis: confidence, liquidity and its sibling, credit, and interest rates, ie, costs. Instead of dithering with half-measures — small rate cuts, ambivalence between keeping rates high to attract remittances, or low to promote growth — the RBI and the government need to act decisively to make India a high-growth market and attractive investment destination. Radically increased liquidity and decreased interest rates (and rationalized taxes) can improve profits dramatically. While global cues will affect foreign investment, convergent action could temper this. These steps are needed urgently, before there is irreparable damage.

* Confidence: All or Nothing

In a crisis, confidence is an all-or-nothing holding action. Tweaking a few props is like putting some timber in the path of a massive flood: it cannot avert the damage. Therefore, instead of business-as-usual, there must be well-orchestrated actions affecting liquidity, credit and interest rates, together with a resolute stance, such as assured access to foreign exchange (as has been done). The restoration of confidence is needed before there is further damage from stalled projects, distress sales of assets, bankruptcies, and massive layoffs.

* Liquidity

A goal-oriented approach is advisable, taking cognizance of the facts, with objectives defined to converge. In the case of liquidity, the issue is the extent of shortage. An assessment of needs must cover the events leading up to the crisis, including the strangulation of liquidity and credit to enterprises because of escalating CRRs and interest rates over the last two years and early this year, coupled with high government and PSU borrowings, eg, the oil and fertilizer subsidies through banks. This ‘backlog’ is one component of liquidity needs. The disappearance of international trade credit is another. Funding needs for enterprise activities and projects is the third, FIIs repatriating when stock prices rise is the fourth, and a revival of consumer spending the fifth. This is the demand for which the RBI should provide. The order of magnitude required may be two to three times what was done last week, achievable by a further cut of 2 per cent in the CRR (presently 5.5 per cent), to signal a ‘liquidity bank’.

* Credit Availability

Once there is liquidity, banks must be encouraged to lend based on acceptable criteria. This needs more than admonitions from the Finance Minister. The most direct signal is a disincentive: a low reverse-repo rate, so that banks cannot simply park funds profitably with the RBI (they may still opt for government bonds for safe returns, for which other disincentives need to be devised to discourage excess). True, given our risk-averse bias, there are many reasons for bankers to hesitate in making lending decisions according to their business judgment. This bias will take time to grow out of, but the process needs to be helped along by structuring systemic support that rewards productive lending over unduly risk-averse behaviour. Unfortunately, that isn’t all: structural support also needs to be devised to guard against arm-twisting by predatory politicians, and to protect bankers from them.

* Cost of Funds

To rid ourselves of unnecessary, self-imposed constraints, we need a further cut of at least 2 per cent in the repo rate. There is no conceivable reason for imposing high costs for money. As for attracting foreign remittances, their incentive is the spread between offshore deposit rates (low in many places) and Indian rates. Some economists argue that high demand for funds keeps India’s rates high, but finance professionals — finance and economics are different domains — will tell you that the demand for funds is always high in an active economy, while a major component of the cost of funds is a regulatory construct. It is bankers who ration supply on the basis of their criteria, unless compelled to do otherwise.

Also, high rates inflate India’s cost structure unduly, as the cost of money has an input multiplier effect on other prices, ie, interest costs as a percentage of revenues, or of total costs, understates the detrimental effects of high interest rates.

With lower interest costs, Indian enterprises will earn higher profits. If growth is nearer potential, enterprises will attract more from investors, including foreign investors, as was the case in the last few years. This is why the RBI and the government must act decisively on building confidence, liquidity and credit, and cut interest rates.

shyamponappa@gmail.com


For recent views that support these measures, see:

'There's no need for irrational pessimism', Deepak Parekh interviewed by Shobhana Subramanian: http://www.business-standard.com/india/storypage.php?autono=339444

However, Dr. Rangarajan says the RBI has done enough:

'The financial crisis and its ramifications', C. Rangarajan:
http://www.hindu.com/2008/11/08/stories/2008110850911100.htm


† Added later (November 11, 2008): As a matter of fact, it turns out that the government has again done too little in cutting duties and taxes on ATF. A piece in the Business Standard titled, 'Taxes, costing methods make Indian ATF prices highest in Asia-Pacific', by Rakteem Katakey shows that despite a 36 percent cut, prices in India at Delhi and Mumbai are 60 percent higher than in Singapore and Kuala Lumpur.