Let’s check the facts. Kingfisher has accumulated losses estimated upto Rs 7,200 crore. The airline has never reported a profit in the past seven years. What is interesting about his investments is that not even one rupee is from his own pocket. The man has not paid salaries to his employees for over six months. The debt that was converted into equity is one-third of its value now. So, assuming these shares will have buyers, public sector banks that invested in Kingfisher have already undergone losses. Why did public sector banks invested in this troubled airline? To prevent airline prices from skyrocketing as a result of more and more operating losses incurred by King Fisher forcing it to ground its flights.
When Mallya took over Captain Gopinath’s low-cost carrier Air Deccan and converted it to King Fisher Red, the man essentially forgot why Air Deccan was profitable in the first place. Captain Gopinath wrote an article in the Indian Express a few months ago sighting how making Air Deccan’s service same as that of a King Fisher luxury experience without raising ticket prices might not be a good idea.
The private sector and free markets promote efficiency of services with a high margin of profit. But a necessary consequence of markets highlighted by Schumpeter over 60 years ago often gets ignored. That is ‘creative destruction’. When public sector companies enter the economy to bailout the big banks and airline carriers that erred, this market mechanism is distorted. Also, it is highly unfair towards the taxpayer who has nothing to do with the bad management in a big company. Now that the FDI limit on airlines has been raised to 49%, it is fair to assume that King Fisher, and all other ailing airlines like Go Air, Spice Jet and Jet Airways will find quality foreign investment. So, once this investment does materialize, I can go back to my initial belief that Mallya did know what he was doing. He shifted a heavy portion of his debts to public sector banks and the banks generously obliged taking on these non-performing assets. My question is, where is the risk that Mallya undertook to do this business? This corporate-government nexus is precisely the kind of governance that modern day governments should try to avoid.
The earlier reluctance of the Indian government to open up our banking and insurance sectors to foreign investment is probably the reason why we survived the recent recession without damages like in Europe and the USA. As much as I am for encouraging new investment for infrastructure, the path that we’re taking is absolutely ridiculous. The efficiency of the managements of funds that we have right now is quite bad highlighted by the number of zeroes that are being added to every new government sponsored corruption scandal. In spite of all these, our economy is in a pretty decent shape compared to those in Europe. One wonders then, how credit rating agencies are threatening to downgrade investment status in India while many of these European and American nations are in much worse shape than we are and have better investment grades than we do! Opening up of pension funds, multi-brand retail, insurance and airlines sectors are being termed as ‘reforms’. Without explicitly calling it a conspiracy, there’s a clamour from all directions from the political and economic elites to make the economy more open. But in the spirit of democracy, majority of the population is being ignored here. Even the opposition that earlier called for the PM’s resignation is now silent on rolling back the co-called reforms while prices of food and fuels is skyrocketing. One can’t help but to think that there’s something seriously wrong with the system that we have at present. Economic inequality could be ignored upto a certain point, but what about social and political inequality?