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Mainstream, VOL L, No 39, September 15, 2012

Recent Developments in Air India versus Indian Railways

Monday 17 September 2012

by Hans Huber

Comparing the performance of the Indian Railways with that of Air India should be an intuitive exercise that allows stressing funda-mental issues pertaining to the outlook of two of India’s most prominent PSUs. (See Table 1 for a comparison of the scale of operations) Although a previous paper (Goyal A., 2008) had already applied principles of Transaction Cost Theory (TCE) to a similar topic, its conclusions can appear ambiguous, providing little scope for effective implementation. Other research compared productivity between Air India and other private airlines in India. (Bansal S.C. et al., 2008) Although this approach may be proven, again it failed to make any clear recommen-dations as to how the strategy of Air India needed to be changed. What is probably more irritating is the fact that both approaches failed to raise a red flag and correctly predict the path to doom that Air India had chosen. In particular, no issues were found regarding the merger activities of the NACIL during 2008, on which the author had voiced serious concerns1 earlier. (Huber H. and Lawrence C., p. 67) This concern stood in stark contrast to the support from prominent trade associations and lobbyists. (See CAPA, 2009, p. 3)

Bringing the discussion to a factual level that allows the independent observer to take a stand seems imperative. As it is, the public interest that is at stake, not only from the taxpayer’s perspective (by capital injection or financing of needless aircraft purchases): the real issue is about the development path of India as a nation, that is, the sustained ability of the government to provide freedom and space to its people through mobility at affordable prices. Such an approach needs to go beyond classic micro-economic analysis, although it would remain deeply economic and political in nature. At this point a strong interdependency between both PSUs becomes clear: losses of one PSU constrain the government’s (GoI’s) ability to invest in other modes of transport (deficit spending incurring higher interest rates put aside). Or vice versa, the surpluses made by one PSU (for example, through intelligent and responsible management) will tend to subsidise the other loss-making PSU (where poor management or corruption may be the cause). Such inequity becomes all the more scandalous, if it is the common man relying on inexpensive and accessible railway service that eventually has to foot the bill, whereas the subsidised operator is catering to the upper-middle and upper classes. To what extent such win-lose patterns are accurate, of course, depends on the scale of financial surpluses/losses that are involved.

With the author being a transport economist from abroad, political parties in India are not his prime concern. But the political system in India shows that local constituencies, whether in Bihar or Nagpur, may in the end matter for obtaining ever new funds—without any justifi-cation on economic grounds. Also, accountability seems non-existent (numerous examples show that near identical problems existed in Western countries as well). In other words, no theory (that is, transaction cost economics) can really explain the tale of the two transport PSUs in India: one which had undergone a spectacular transformation, the other factually left bankrupt but no one willing to admit it.

Situation before 2004

By the late 1990s, the situation of the Indian Railways (IR) was judged to be critical and unsustainable. In July 2001, the Rakesh Mohan Committee saw the IR as being stuck in a ‘debt trap’, partly due to important outlays that had been required for infrastructure maintenance and investment. The IR’s ability to self-generate funds had been considered as inadequate.

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Recent Developments in Air India versus Indian Railways [PDF version]
A Comparison of Performance Characteristics, Good Governance
by Hans Huber
in: Mainstream, VOL L, No 39, September 15, 2012
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