State’s Legitimate Monopoly on Market Failures
Sadaf Hussain points out the double standards to which public and private enterprises are held, with respect to the controversies surrounding Air India and Vijay Mallya. He also elaborates upon the characteristics of sound public policy, in particular, rule of law and minimal government intervention.
Waking up to news which talks about fraud or other scam is very common now. Let’s take a look at two big headlines from last year:
“CBI charges Vijay Mallya in loan default”: a case where the owner of Kingfisher Airlines was found guilty of running away after defaulting on ₹9000 Crores worth of bank loans. This harsh headline shook the people — from economists, to the people hanging out at tea stalls. Kingfisher has to pay back that amount to all the investors/loan agency or banks.
Now let us examine another headline that was doing the rounds:
A “mountain of debt” has been slowly killing Air India”: This sympathy-evoking headline referred to the fact that Air India is under debt to the tune of ₹52,000 Crore. And they owe this money to each of us, the taxpayers of the country. This however was a much less discussed story.
In the past, we have also heard of civil suits raised against Coca-Cola over contamination, or against restaurants where a bug was found in the food. How many times are there similar lawsuits over poor quality municipal tap water or PDS or even mid-day meals in schools?
There are certain principles that characterise a good public policy and I am examining two through these examples.
Rule of Law:
The term “Rule of Law” is derived from the French phrase ‘La Principe de Legality’ (the principle of legality) which refers to a society based on principles of law and not of men. In a broader sense it means that the Law is supreme i.e. no individual/agency- whether rich or poor, the rulers or the ruled have any special pedestal and hence, are obliged to obey it. Every individual/agency must adhere to the same law and be subjected to the same consequences. Article 14 of the Indian Constitution declares that “The State shall not deny to any person equality before the law and equal protection of laws within the territory of India”.
Insofar as Rule of Law means what is defined above, a sound policy would impose the same standards, norms and punishment for non-performance on governments as are imposed on non-state providers [LSS].
However, if we connect the above statements with the two headlines we will realise the differential treatment between the two parties. In one case where it is the money of public as well as private money, with a loan of ₹9000 Crore, people have put all faith in government to bring Mallya down. But when government used, and subsequently lost, ₹52,000 Crore of solely taxpayers’ money, no media agency or government entity came out to declare this is as a big blunder troubling the entire economy. In an interview on NDTV on Feb 28 2017, Arun Jaitley said “India takes issue of defaulters very seriously”. But do we really?
The response to a government run entity defaulting on loans was to pump more money into the system. The reasons for this are manifold — firstly, government can afford to run companies at a loss because their revenue is unlimited in so far as they can increase taxes to meet their deficit. Secondly, government employees have complete job security and shutting down the airline will affect that. But in condoning this, are we saying that government work is always benevolent and in the best interest of the public? Or that government employees are more equal than private employees?
The Business of Government is to Govern, not to do Business
Most of the economists and their arguments for government intervention are based on the idea that the market cannot provide public goods and hence we need a strong government. Welfare programs, public health, education, research and development, security services and few others have been labelled public goods. The assumption is also that all these are pro-poor measures, and since common perception is that ‘capitalism is for the rich’ and ‘government is for the poor’. Capitalism creates inequality and provides options only to the “haves”, not the “have nots”. If this is the case, then the question we must ask is, is Air India also catering to the poor? In fact, prices of tickets in Air India are much higher than other private airlines. Primarily, the role of these institutions is to provide government travel and accommodation for government servants. These institutions have reservations and booked slot for politicians, bureaucrats, and government employees. Is it fair to cover their expenses using taxpayer money?
But an even more pertinent question is whether running hotels and airlines is a core function of the government? Does the Government have no other important function to carry out? Should the focus not be on securing the safety of people against threats to their life and liberty?
We do have a lot private flights; in fact 84% aviation is being run by them. They also add on to the tourism revenue of our country by giving people value for money, and better connectivity. Private players come up with innovative ideas as well to minimise their cost, because they are not being fuelled by taxpayers’ money. When people are able to care for themselves and others, it is unwise to take away their freedom and responsibility to do so.
This situation with nationalised airlines is not a problem unique to India. Such airlines often have terrible track records. An article in Handshake, IFC’s quarterly journal on PPPs, points out that overregulation, overstaffing, excessive debt, political interference and poor management are all too common. The authors, James Morley and Brian Samuel, describe the record of state-owned airlines as “abysmal” and flatly state that “governments have no business being in this business”. So the problem seems endemic to nationalised airlines, and not to Air India.
There are so many examples from around the world, that have privatised their airlines and seen a sea-change. For example, Kenya Airways and Samoa’s Polynesian Blue were privatised over 20 years ago, both airlines have been profitable for years and contributed to growth in their respective tourism sectors.
In an interview on CNBC-TV18, Arvind Panagriya, Vice Chairman of Niti Aayog said “I think really where Air India stands now; it is almost a matter of existence. The debt is already about Rs 52,000 crore (and) we are adding of Rs 4,000 crore debts every year so this is simply not sustainable.” He further added “In the end, I think the airline does need to go with management in the private hand.”
While on the other hand an article on Outlook reports how former employees of Air India are saying privatisation is unpatriotic. The union has proposed that the government could waive Air India’s Rs 52,000 crore debts so that it can “forge ahead” with plans to do to make the national carrier attractive for a private player.
Are we being biased for Air India flight and not shutting down this loss making institute because we want government employees to have job security? Is the welfare of 14,000 odd employees really the best way to deploy taxpayer money? Can this money not be used to build schools or help poor farmers living in dire situations, instead? I can see a number of more fruitful and efficient ways in which this money can be used, rather than bailing out a failing airline, which is not even the most often used service-provider in the industry.
As Bastiat said, everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone. It is the public investment and organisation/business we should be more wary of, and not necessarily private players. We should be going out of our way to make government more accountable and questioning them about the use our taxes, the more the PSU loses, the more taxes we will have to pay.
