The Kingfisher bailout smacks of crony capitalism. What else is new?
Mallya is not only expecting more money from banks to fund his eternally cash-guzzling business, but also a policy change that will help him get a partner with deep pockets. No, of course, that would not mean giving up control—no matter that accumulated losses at Kingfisher by the end of this year would be Rs 7,000 crore. He is a big businessman, he is a Rajya Sabha member, he plays hard. He cannot lose. That’s capitalism, Indian style.
About a decade ago, Raghuram Rajan wrote the path-breaking Saving Capitalism From the Capitalists. The book’s theme was simple: what we label as capitalism is often a distorted version; the true spirit of capitalism is undermined by capitalists themselves—by getting an unfair advantage, as in crony capitalism. India’s airline business is a great example. Interestingly, Rajan is quite comfortable being an advisor to PM Manmohan Singh, whose government has set new standards for crony capitalism. (Rajan prefers to rail against India’s education system, but that’s another story.)
As part of a perverse policy followed by successive governments, Indian private sector entrepreneurs with no experience in the airline business were licensed. This led to the quick entry and exit of many players (some with questionable reputations) like East West Airlines, ModiLuft, Damania Airways, Air Deccan, Air Sahara, Paramount, among others. This was not normal business mortality. While the Indian air carriers were experimenting with business models, the “open skies” policy remained closed to deep-pocketed foreign investors who had real expertise in running airlines unlike chicken kings, liquor lords and sundry egomaniacs.
This policy of admitting the undeserving, while keeping out the deserving, has created a sick industry and harassment for Indian air travellers. Indeed, Kingfisher was not only allowed entry, it could also easily lean on government-owned financial institutions to fund a business that never had any real hope of making money. Later, when the loans turned bad, it could get part of the bank loans converted to equity.
As part of the same kind of capitalism, the aviation ministry wreaked havoc on the national carrier, Air India. Canadian research firm Veritas calls the civil aviation ministry’s attitude to Air India “duplicitous” and observes, “It could be on the diktat of the regulatory authorities involving various ministries of the Government of India that an unviable airline, Kingfisher, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.” Entry for dubious parties, barring foreign investors who have run airlines, suffocating the state-owned carrier, getting state-owned banks to lend, getting the banks to convert debt to equity—this is copybook crony capitalism.
Since Manmohan Singh’s government will do nothing, redress may come by other, natural means. About three years ago, I was chatting with a foreign institutional investor who has put quite a bit of money into United Breweries. He asked me what I thought of UB. The “story” was great: Indians were getting prosperous and drinking more beer, per capita consumption was low and UB was the biggest player. How could you go wrong? Having seen Indian businessmen from close quarters for 28 years now, I told him UB will go bankrupt before making him rich because that would be Mallya’s only source of funds for the eternally loss-making Kingfisher. He smiled and said: “We are betting on that.”
Mallya had already given up a part of the UB’s spirits and beer business to foreign partners and was running down the rest of the value by using it to fuel his flying adventure. Competitors like Kishore Chhabria and Mallya’s own partners and investors have been biding their time. Has the time come for the tale to play out rapidly to its obvious conclusion, now that respected activists like Aruna Roy or Nikhil Dey have voiced their well-reasoned protest? Or will capitalism continue to be undermined by capitalists, netas and babus?
(Debashis Basu is the editor and publisher of Moneylife)