Free Press Journal

Welcome opening up of FDI

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The Government was slow in pushing economic reforms, believing in incrementalism when the gains could have been much greater had it undertaken these in a bold and decisive manner early on in its term. This is not to say that some of the most progressive reforms, vital for re-ordering the economic system in a transparent manner, have not taken place. They have.  The GST, the Real Estate Regulation Act, and the Insolvency and Bankruptcy Code are path-breaking measures which will eventually rid the system of a huge number of malcontents and malpractices and inject credibility in the economic environment.

However, one distinct area, where the Government has lagged far behind, is disinvestment. When Modi first came to power, it was expected that the disinvestment of unproductive public sector assets would be taken up speedily. Over a period of time, it emerged that Modi did not believe in selling public sector units, instead in putting them back on an even keel. That was what he had done in Gujarat, restoring to health several sick State-owned companies. Despite setting a modest target for disinvestment in the last Budget, the actual realisation will woefully fall far short. Belatedly, when the Government failed to stop the State-run Air India from bleeding – its cumulative debt now totals above Rs 50,000 crores – a decision was taken to sell it off.

Given the stiff terms and the uncertainties endemic to the aviation sector globally, there has not been much interest from potential buyers. Though, the losses have come down, thanks to an uptick in the sector generally due to lower fuel prices, Air India continues to lose over Rs 3,500 crores annually. The only way to stop the recurring burden on the taxpayers is to privatise it and, if that is not possible, to close it down outright. It is a white elephant, saddled with a disproportionately large workforce and running wholly uneconomic operations in sectors which private airlines are loath to fly to. The social welfare obligations of the government-owned airline can be performed by the private airlines with the taxpayers contributing a cost-equalisation subsidy, but keeping Air India in the government sector does not make any economic sense.


It is perhaps this realisation which led the Government to allow potential bidders for AI to partner foreign carriers who can now own up to a 49 percent stake in a joint partnership. This should help expand the number of potential investors.  Given the cash-rich West Asian airlines, which had had a very favourable treatment in India due to the largesse extended by the UPA, and their ever-rising footprint in the global aviation sector, it is more than likely that AI too might be snapped up by one of these airlines though an Indian partner. Also, a respected business house with a proud history in the aviation sector too might not lag behind, though it cannot match the highly subsidised airlines of the oil-rich sheikdoms.

Meanwhile, the Government has done well to ignore the draft report of a parliamentary committee which has virtually argued against privatisation of AI. To put it bluntly, the MPs don’t want their arm-twisting of and favour-seeking from AI to end anytime soon. It is silly to suggest that AI be given another five years to turn the corner, whereas the truth is so long as it is government-controlled it is beyond redemption. The number of employees per aircraft in AI is at least five times higher than in the private airlines. How can this burden be reduced now or in the next five years?

Meanwhile, with the month-end Davos meet in view – the prime minister and a number of senior ministers are scheduled to participate – the government has allowed 100 percent foreign direct investment, as against the existing 49 percent, to single-brand retailers through the automatic route. This should make for a further ease of doing business, though how enthused will be single-brand biggies, Apple, for instance, only time will tell. Again, allowing a grace period of five years for the 30-percent local sourcing of goods to foreign retailers for their global operations will ease the pressure on foreign retailers.

In the five-year period they can locate local partners who can match their global standards for quality and timely deliveries. One hundred percent FDI in real estate broking – not to be confused with real estate business – too is welcome. So, is the removal of restrictions on foreign institutional investors in power exchanges through the primary market – until now they were allowed only through the secondary market. All in all, a belated but welcome easing of FDI norms.