Privatization of Air India: Economic and Legal Impacts

    In 2017, the privatization of Air India was approved, and in 2018, the Government proposed to unship 76 percent equity share capital of the airline and transfer the management to private entities. However, the offer failed to attract any bidder. Therefore, the Centre planned to divest its entire stake in Air India to attract private entities.

    Historical Background

    J.R.D Tata founded Air India in 1932. It was known as Tata airlines up until the Second World War. In 1946, Tata Airlines was converted into a public company and was rechristened Air India Limited. In 1953, India nationalized all the Indian Airlines dividing the corporation into two parts, namely, Indian Airlines Corporation and Air-India International Corporation, which came to be known as Air-India in 1962. Later the airline removed the hyphen from its name, and the airline was to be known as Air India.

    The airline has both Airbus and Boeing in its fleet and offers connections to over 100 domestic and 70 international destinations. Until the 1990s, the airline enjoyed a monopoly over the market for a long time when it was under the guardianship of J.R.D Tata. The airline was attached to the Indian culture, and people felt a sense of connection with the mascot that depicted rich Indian values. However, when the Government opened the private sector market, the airline bore the brunt of it. This increased competition pushed the government-owned airline out of the market, and it started suffering heavy losses. Several failed government policies, corruption cases, and collective negligence doomed the profits of the airline. The desire to expand acquisition caused irreparable harm to the future of the airline. The merger with India airlines played a crucial role in worsening the condition of the airline. The merger forced Air India into a vicious circle of losses and debts, and there was no way out of it.

    Role of Covid-19

    The situation was already worse when the outbreak of Covid-19 added insult to the injury. These unprecedented times adversely affected the whole World. In India, all the sectors came to a standstill with a crumbling economy. Aviation industry giants are also devising methods to deal with these long-term detrimental effects of the pandemic. The initiative of divestment overtaken by the Government was interrupted and now seems impossible. To understand the legal and economic impact of the privatization of Air India, we need to discuss the concept of divestment and privatization briefly.

    Divestment is a process through which the Government or organizations usually try to make up for the losses. It is when the Government or organizations sell assets of a company or its subsidiary in order to raise revenues. The Government has recently adopted this method to shut all loss-making organizations and increase non-tax revenues. Divestment is part of the new policy of ‘Liberalisation, Privatisation, Globalisation,’ and this policy has helped the Government cut off its fiscal deficits.

    The National Democratic Alliance (NDA) government, under Prime Minister Atal Bihari Vajpayee, made the first and most strategic disinvestment in Bharat Aluminium Company (Balco), Hindustan Zinc, Indian Petrochemicals Corporation Limited, and VSNL.

    On the other hand, privatization means transferring the control and execution of services that the State regulated to private entities. After privatization, the public is barred from holding equity in the company in cases of public limited entities. Predominantly, it transfers the powers to govern the company from the hands of the State to the private sector. There are three essential features of privatization: the transference of ownership, dilution of State monopoly, and decrease in government interference. The transfer of ownership to private sector players curbs the interference of the Government and thereby ensures that economic democracy prevails. Following are five broad advantages of privatization:

    1. Increase in efficiency: Private sector is whole-heartedly dedicated to growth and development. There is no space for politics to creep in, and the focus is only on economic wellness. This increases the efficiency of manifolds.
    2. Increased competition: Government-owned companies enjoy unhindered monopoly in their respective sectors, and there is no scope for competition. This, in return, diminishes the scope for improvement. However, privatization strikes at the root of this stagnant growth and accelerates economic growth.
    3. Improved customer service: One of the direct consequences of the increased competition is the enhancement in the quality of services provided to the customer. Government-owned businesses are not profit-driven, and therefore, no active efforts are made to improve the quality of services (India railways can serve as a classic example). However, with the ball in the Court of private companies, the game is changed. The private sector pays undivided attention to its services in order to survive in a highly competitive market.
    4. Higher investments: Privatization gives a sense of surety to the investors, and the robust economic structure and management attract the investors to invest in the privatized venture.
    5. No political intervention: One of the advantages of privatization that has endeared it to the public is the absence of political influence. After privatization, the Government has no role to play in the management of the organization, and there is no scope for foul play left. The management becomes profit-driven and no more politics-driven.

    In 2017, the privatization of Air India was approved, and in 2018, the Government proposed to unship 76 percent equity share capital of the airline and transfer the management to private entities.[1] However, the offer failed to attract any bidder. Therefore, the Centre planned to divest its entire stake in Air India to attract private entities. However, the efforts of the Government failed miserably, and no bidder was ready to purchase a debt-laden airline. However, at the beginning of 2020, the Government released a new “Expression of Interest” offering a hundred percent stake in Air India and fifty percent shares in Air India SATS Airport Services PVT Limited (AISATS).[2] This time the Government has absorbed more than half of the airline’s debt, and the new buyer will only have to pay a reasonable amount to clear off the entire debt.

    So far, the decision of the Government appears to be beneficial. Now let us discuss the economic and legal impacts of this decision in order to decide upon its efficacy.

    Economic Impact of Air-India’s Privatization

    Taking into account the advantages of privatization, as mentioned above, the chances of witnessing some positive economic impacts are high. The Government spent billions to revive the airline, but it did not give the desired results, and privatization was the crying need of the hour. The oceanic amount of funds and taxpayer money invested in Air India can be utilized in improving other sectors of education, healthcare, forest, etc.

    The private sector has turned out to be a more efficient player in the field of aviation and has been giving tough competition to the Government, who are not well versed in technical know-how. The sluggish monopoly of the Government did not offer requisite up-gradation, and therefore, the shift in the power-control was necessary for technological advancement.

    It is reasonable to expect that after privatization, the private sectors will focus on up-gradation by utilizing their resources and improving the standard of services of Air India. Consequently, the efficiency of Air India will also increase.

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    However, every coin has two sides. Ending state monopoly will result in an absolute monopoly of the private sector. This monopoly will add a financial burden on its customers and make affording the airline’s services relatively difficult. The analysis affirms that strategic privatization and disinvestment improve the performance and productivity of an organization and improve its prospective to earn profits.

    Legal Impacts of Privatization

    Articles 14 to 18 of the Constitution of India have defined equality for the citizens of different races, caste, sex, religion, place of birth. Under our Constitution, each person has an equal right to speech, work, life, and guaranteed equality of opportunity in employment matters under the State.

    Article 14 reads, “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”[3]

    Article 15 says, “The State shall not discriminate against any citizen on grounds only of religion, race, caste, sex, place of birth or any of them.”[4]

    Article 16 provides, “There shall be equality of opportunity for all citizens in matters relating to employment or appointment to any office under the State.”[5]

    Article 17 provides for the abolition of untouchability.[6]

    Article 18 demands the abolition of all titles except academic and military.[7]

    These fundamental principles are indispensable for State-owned entities. However, the privatized entity may not uphold these rights guaranteed under the Constitution, and there is a lack of a proper mechanism to hold the private sector liable for their violation and blatant discrimination. It is not unreasonable to anticipate that the price of air tickets will shoot up once the airline is privatized because of the extensive up-gradation that privatization will offer. The increase in the fare is against the principle of the welfare state as the perks of privatization will not be shared proportionally by all and in violation of the fundamental rights that ensure equality to the citizens. As a result of the transfer of powers in the hands of the private sector, the ones who are already wealthy will become wealthier, but the situation of the poor and the middle class will never improve.

    Moreover, there are concerns related to the livelihood of the employees who were working in the Government-owned company. However, according to precedents, the employees have no say in the economic decision taken by the Court. In Balco Employees Union v. Union of India,[8] the employees of Balco company challenged the decision of the Government to sell its majority shares in the company, which resulted in a shift in the management of the company from the hands of the Government to private hands. It was contended that this sale of shares would have a drastic impact on the lives of the employees. The Hon’ble Court gave the judgment in favor of the Government that disinvestment was a purely administrative decision. Therefore, the employees do not have any authority to challenge the decision. The Government has the sole authority to sell the stakes in a Government-owned company. The judgment of the Court approved the policies of privatization and divestment adopted by the Government for the economic growth of the country. It is important to note that the judgment established that when the employees are not consulted before deciding with respect to the management of the company, they cannot claim that such privatization violated the principles of natural justice.

    However, in the case of Rahul Mehra v. Union of India,[9] the Court laid down the public function test. It was held that whether a private entity would come under the meaning of State would be dependent on the nature of the functions performed by the entity. Hence, even the privatized companies can be held liable if they infringe the fundamental rights of citizens.

    India is a liberal economy, but our Constitution makes reference to Socialism. Time and again, Socialism has shaped the principles of economic and social policies of the Government. Scholars who are in favor of the socialist character of the economy support the privatization of Air India. It is believed that privatization strikes a balance between the ownership of the Government and private entities. In the private sector, each player is dedicated to high-yielding measures and aims to keep the friction of failures minimum, therefore it is in the best interest of the economy.

    Conclusion

    All in all, after looking at the losses that the Government incurred in an attempt to rescue Air India, privatization seems to be a panacea at the moment. Times are difficult, we are battling a pandemic that is far from the end, and the economy is crumbling. The Government cannot afford to offer more subsidies to the airline and put billions down the drain. It needs to find the bidder who is willing to accept our oldest airline with the remaining debt and resuscitate its operation. After analyzing the economic and legal impact of the privatization of Air India, it can be concluded that this is undoubtedly a way ahead and should have been done a long time ago. This would have helped the Government to save the money that was spent on its incompetent policies. However, better late than never.

    References

     [1] PTI, Air India privatization unlikely to conclude this fiscal, The Hindu, December 20, 2020, Available at: https://www.thehindu.com/news/national/air-india-privatisation-unlikely-to-conclude-this-fiscal/article33377568.ece. (Last visited on April 14, 2021).

    [2] Ibid.

    [3] The Constitution of India, a.14.

    [4]The Constitution of India, a.15.

    [5]The Constitution of India, a.16.

    [6]The Constitution of India, a.17.

    [7]The Constitution of India, a.18.

    [8]Balco Employees Union v. Union of India, (2002) 2 SCC 333.

    [9]Rahul Mehra And Anr. v. Union of India (UoI) & Ors, 114 (2004) DLT 323.

    BY- ANANYA BAJPAI | WEST BENGAL NATIONAL UNIVERSITY OF JURIDICAL SCIENCES

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