Not for state to keep Air India flying

By Atanu dey

Air India is a prime example of what’s wrong with Governments getting involved in business.

There’s absolutely no reason why any Government should be in the business of running airlines, least of all the Government of a developing country. There are many reasons why the Government of India should not be in any business, least of all a business like commercial aviation. The first and foremost reason is that it serves no social purpose.

The service that commercial aviation provides is a private good, just like dentistry or accounting. People’s consumption of private goods — the demand — is adequately provided by a competitive marketplace through firms that compete for customers. The market is fully able to discipline firms by weeding out those which are unable to make a profit — which is another way of saying that the benefits that they provide (which is measured by their revenues) exceed their costs. Profits of firms in competitive markets are a proxy for the benefits that accrue to society.

Government intervention in the provision of private goods has to be limited to only regulating of competitive firms. In those specific cases where the operations of private firms in the provision of private goods lead to any form of harm (so-called ‘externalities’ such as the emission of pollutants) does the Government have a role in interfering in the market. But under only very special circumstances is the Government justified in the actual provisioning of a private good.

One special case would be if the private sector were incapable of providing the private good. Consider the case that there is a very large fixed cost involved — such as building a high speed nationwide railway network which would require an investment of say $300 billion just for the capital costs. No single private firm could possibly invest that amount, although a consortium of very large private firms could do it. The Government’s role in coordinating investments in such a large project would be justified on the grounds that the project would lead to social welfare gains that could not be otherwise obtained.

Not too many years ago, before the liberalisation of the commercial aviation sector, the only option available to domestic air travellers was Indian Airlines, the public sector monopoly. The aviation sector was small, severely capacity constrained, and expensive. Being a monopoly, the service was bad and the service providers were generally rude. But that is what one normally expects from monopolies — whether they be in the business of providing services or goods. Many of us remember those days when telecommunications services were a luxury for which the waiting time was measured in years and bribes were an accepted part of reality.

The Air Corporation Act of 1994 liberalised India’s aviation sector, and the Government monopoly was ended. That was a welcome development and it benefited Indian travellers. Private sector airlines have done a great job of meeting the demand for domestic and international air transportation. Service quality has improved dramatically and prices have come down — as would be expected in any competitive market. If there were any doubts about the Indian private sector being able to adequately supply to the demand for air transportation, they have been laid to rest years ago.

So why does the Government of India continue to run Air India? It should not have even if Air India were not losing money. The Government has not demonstrated competency even on those essential public services where it has to be the sole provider. That alone is sufficient argument for it not to be in aviation. The case against the Government gets even stronger when Air India is so mismanaged that it loses money in thousands of crores of rupees.

The answer to why Air India exists as a public sector corporation is quite straightforward — and extremely sad for India.

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