In the 1950s, first-time parliamentarian Atal Bihari Vajpayee asked about the Ashok hotel, then being constructed in Delhi: Why was the government building a five-star hotel and not a hospital? The standard socialist ideological response of inadequate private capacity was inapplicable; Jamsetji Nusserwanji Tata had set up Mumbai’s magnificent Taj Mahal hotel in 1903. Prime Minister Nehru replied that hospitals would be built from the profits earned by the luxury hotel. But Vajpayee’s substantive question was about strategy, the trade-offs that reconcile unlimited aspirations with limited resources. Air India’s sale is important for three reasons — priorities, resources, mindset — and is a template for the Indian state to do more by doing less.
First, priorities. If corporate strategy is the art of creating unfair legal advantages, no government can run hotels, automotive or steel companies competitively. Public commercial enterprises have unfair disadvantages in human resources. Air India had 12 trade unions, employees per plane were double global standards, and employee cost was an abnormal 20 per cent of revenues. Also, if commercial activity by the state generated prosperity, then Pakistan or North Korea would be thriving economies. The state’s core job — security, primary healthcare and education, research funding, justice delivery, etc — suffered after Independence because scarce public resources were diverted to doing things that the private sector could do better. Air India’s sale represents a welcome shift in policy.
Second, resources. In 1953, the Hungarian economist Janos Kornai warned that state sector firms indulge in “investment hunger” and don’t fear losses because they know they will be bailed out. Around the same time, Air India cost the government only Rs 2.5 crore to buy, but it has incinerated Rs 1.1 lakh crore since 2009 (this could fund 15 years of school mid-day meals or be used to set up 660 medical colleges). Kornai termed this excessive money appetite as “soft” budget constraints. The Supreme Court agreed when it described Air India’s 2007 purchase of 111 planes for Rs 67,000 crore as “unnecessary”. Air India’s nationalisation cost about Rs 20 crore in losses per day and its monopoly caused a 25-year delay in India becoming the third-largest civil aviation market.
The government’s creativity and persistence in divesting Air India must be replicated with most of the remaining 360-plus central PSUs. In parallel, with state government finances also ravaged by the pandemic, states privatising over 1,500 poorly run state PSUs could ease fiscal woes. Federalism is also about being responsible with public funds provided by taxpayers and devolved by the Union government.
And third, the mindset. The 1970s government’s belief in its omnipotence is captured by the PMO bureaucrat PN Haksar’s response to an application for private scooter capacity expansion — reject it and set up Scooters India (another misadventure). The command, control and conquer mindset of the 1955 Avadi resolution — century-old second-hand ideas of a dead German guy — ignored our folk wisdom of jahaan raja vyapaari, vahaan praja bhikaari. Who is responsible for Air India’s capital bonfire? Politicians, bureaucrats, managers, or workers? Unfortunately, public sector governance mirrors Agatha Christie’s Murder On The Orient Express — if everybody did something, then nobody can be held accountable. Counterintuitively, many individuals involved in the Air India disaster went on to greater career heights because of performance feedback mechanisms that value visibility, perception, and silence over tangible outcomes. The “fatal conceit” represented by Air India’s seven-decade tragedy suggests we need better role balancing between the three pillars of team India — private, public, and nonprofits. Or what poet Brij Narayan Chakbast called anasir mein zahur-e-tarteeb (orderliness among elements).
No civil servant running Air India could deliver the “tone from the top” that JRD Tata did. An employee recalls “JRD would walk the aircraft, checking furnishings for stains, toilets for cleanliness, curtains for fraying, and windows for dust”. A note from JRD admonished “the tea served on board from Geneva is, without exaggeration, indistinguishable in colour from coffee. I don’t know whether this is due to the quality of tea leaves or excessive brewing”. Some analysts believe the acquisition is unviable nostalgia by the Tata group, but the price feels right, consolidating three carriers creates synergies, and the 60 per cent market share of a competent competitor creates vulnerability. Most importantly, if entrepreneurial business houses like the Tatas don’t make risky but industry-transforming bets like Air India, who will?
Under Deng Xiaoping and Zhu Rongji, China converted over two-thirds of its state-owned enterprises to private ownership, boosting productivity manifold. Under Xi Jinping, China is piling up debt, shovelling cheap credit to unproductive state firms, and attacking the private sector. China is powerful because of a $14 trillion GDP fuelled by private entrepreneurs, foreign investors, and multinational companies. China is dangerous because it now accounts for half of Asia’s military spending. India lost the 1962 war for many reasons, but public appeals to knit socks, gloves, and sweaters for our poorly equipped soldiers back then surely reflected a weak economy and poor policy prioritisation. Privatisation hardly means a weak or small state; a modern state is a welfare state. But the top ranks of Norway, Sweden, and Finland in government spending as a share of GDP are financed by their private efficiency. We hope India’s tax to GDP rises from 18 per cent to 30 per cent in our lifetimes, powered by a large, dynamic, and inclusive economy that finances focused, accountable, and decentralised state spending.
In 1984, JRD Tata told the by then retired PN Haksar, “I began my 55-year-old career as an angry young man because I couldn’t stomach foreign domination… I end it as an angry old man… because the system of licences and controls not only discourages honest free enterprise but encourages a new breed of incompetents, bribers, and tax evaders”. Titans like JRD surely go to peaceful places after they leave us, but we are sure he is smiling today as Air India returns home, 70 years after his 20-year-old was kidnapped.
This column first appeared in the print edition on January 27, 2022 under the title ‘Do more by doing less’. Sabharwal and Mantri are co-founders of Teamlease Services and the India Enterprise Council respectively
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