Air India - Let the parting begin..

     The government at long last decided to support Air India with the latest rescue package. Plans call for an infusion of Rs.30000 Crore over the rest of this decade. Needless to say, that is a very large sum of taxpayer money to commit to a difficult and volatile business.

    To be sure, the aviation industry in India is experiencing healthy growth. Carriers from the gulf region are doing really well connecting their hubs to India. The fresh capital made available to Air India would allow it to induct new Boeing 787's and 777's it has on order. These modern long range planes should enable Air India to connect most parts of the world to it's hubs in Delhi and Mumbai. There is still room to add a third hub in India, possibly Hyderabad,Chennai or Bangalore. Chennai and Bangalore especially are seeing good growth in passenger traffic. If they are willing to add a fourth hub in europe, they can then cover the entire globe. It is not unheard of for major international carriers to operate out of several hubs.

    With the announcement of this latest package, the aviation ministry is setting reasonably high benchmarks for performance for the company. It is yet unclear if the employee unions would go along with the plan. Only an incorrigible optimist would believe that Air India would be rid of calamitous mismanagement and political meddling that have plagued it for decades. Even if it happened, there are no guarantees that the next government to come to power in 2014 would follow through with the turnaround plan.

    Attempting to privatize the airline when it was in dire financial straits would have been difficult. Now that the funds have been committed for the next few years, it is time to start thinking about divestment of at least part of the company. Those Rs.30000 Crore could be considered an expensive yet necessary parting gift.

Cut rate policy making

    After nearly three years, RBI reduced lending rates by an unexpected 50 basis points. This seems to have been a reaction to prospects of sluggish growth at home and a slowdown in many of the OECD countries. The RBI is still wary of the inflationary pressures.

“It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates,” Subbarao said, adding that going forward, the policy stance would change based on the growth-inflation dynamics.

The RBI also said, “The economy is likely to revert close to its post-crisis trend in FY13, which does not leave much room for monetary policy easing without aggravating inflation risks.”

    Unfortunately, the executive branch of government has been too paralyzed to respond with robust policy measures to support growth. Without higher spending on infrastructure, reforms to food retailing the combination of faster growth and moderate inflation rates are unlikely to be achieved together in the near term.

    Relying solely on the central bank to fulfill the dual targets of high growth and low inflation would render  monetary policy inflexible and sub-optimal.

Roads to somewhere

    Chief among many complaints heard from corporate India about doing business in the country is the poor state of physical infrastructure. Roads are the most visible part of the deficit. During the first term of UPA(2004 to 2009), the country failed to achieve the stated goal of building 10 Kms of highways a day.

    In the last three years , things seem to be taking a turn for the better. After being reelected in 2009, UPA-2 set itself a target of building 20 kms of roads a day. For that to happen, at least 7500 Kms of construction contracts need to be awarded every year. Judging by the trends of awards in the last three years(chart below), that ambition seems to be turning to reality.

Date Source: Economictimes and infrawindow

    With parliamentary elections due in another two years, nobody knows if the momentum will be sustained in the long run. Politics aside, there are signs of enthusiastic participation by private players in the highway construction sector.

    If only the government can get other sectors of infrastructure(power, freight rail, ports) to start seeing similar levels of growth. It would go a long way towards easing the supply bottlenecks that play such a key role in keeping inflation persistently high.

Articles of interest - April 12 2012

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