Jet-Etihad deal clears way for Air India's entry to Star Alliance

In Naresh Goyal's Jet Air, the 24 per cent stake sale to Abu Dhabi's Etihad Airways, there is a hidden message! Etihad's stake buyout into Jet was approved today and brings in approximately $379 million of direct equity resources to the company. 

The financial and equity tie up with Etihad implied Jet has given up its aspiration to join global alliances, at least for the moment. Jet Airways since 2009 was an aspirant to become a Star Alliance member. None of the large gulf carriers are presently members are any of the alliances and have shown little inclination to join any of the three – Star Alliance, SkyTeam or One World Alliance. Large gulf aviation companies, Emirates and Etihaad are pursuing their own partnerships, independent of the alliances. The exception is the Qatar Airlines that joined One World on October 29, 2013.

None of the Indian carriers though are members of any of the global alliances.  The only private sector airline to pursue entry into a global alliance was Kingfisher. Kingfisher had sought entry into OneWorld though even that was thrown out despite Economic Times disinformation in November 2011. Kingfisher's virtual ejection from OneWorld alliance was driven by the company's insolvency and financial delinquencies.

Jet's virtual quit from the race to enter the alliance paves the national carrier Air India's entry into Star Alliance and partnering with Lufthansa. Air India though still  would have to clear some hurdles before the entry to alliance materializes. Air India's entry into Star Alliance was put on put in abeyance by the Star alliance executive council, (comprising of chief executives of the member airlines) on July 31, 2011 on the grounds that the carrier had failed to comply with some of the conditions to join the alliance. However, it was widely suspected in the entire Indian aviation industry that Air India's entry into the alliance was sabotaged by rival carriers, with the prime suspect being Jet Air.

Air India since then however has overcome most of its financial troubles with support from its single stakeholder, government of India, and the acquisition of new Boeing aircraft. Since the beginning of last year, Air India has consistently operated at passenger load factors of 82 per cent, but still some distance away from the domestic industry's best airline, Indigo's 87 per cent. But Air India was far ahead of Jet and Spice jet both of whom are dogged by losses.

Air India operating ratios this year could be well below 100 as low as 97 per cent, meaning operating incomes would be in excess of operating expenditure. Though that could mean operating profits, the national carrier would still need capital support from the government to the extent of $ 2.6 billion (Rs 16226 crore) over the next four years to wipe out accumulated losses of over $1.2 billion (Rs 7500 crore).  Other revenue sources are also likely to come through, if Air India manages to divest some equity from the MRO (maintenance, repair and overhaul) business and lease surplus carriers to other operators, including emerging domestic operators. Both these options are on the table for Air India.

The situation however is not similar for the private sector players. Private sector players unlike Air India are far more vulnerable, especially since their costs, barring those to domestic employees and airport charges, are mostly dollarized. The entire fleets of domestic carriers are leased, linked to floating rates and benchmarked to LIBOR. That means with the currency depreciation, operating ratios have deteriorated, translating to lower profits. The result is both Jet and Spice Jet are staring at red lined balance sheets. But losses also mean raising equity funds become difficult. All debt funded carriers face a Kingfisher predicament, with air assets spending more time on the ground than on the air.

For the Maharaja, it is time to twirl the whiskers and smile again. Good times after all are beginning to return!  

    

A myth called India's high growth!

India's high growth story is turning out to be a lot of hot air and fast unraveling. Companies shutting shop have increased. That is showing up in the rising non-performing assets (NPA) within the banking system.

Delinquent loans, where interest and principal are overdue, with the banks are presently 4 per cent of the gross loan book or Rs 2.5 trillion. On the face of it, the NPA's are just about 3 per cent of India's gross domestic product and is far lower than those in Europe or in the United States providing a sense of comfort.

However, there are another set of numbers that convey worry. Those numbers include companies seeking debt restructuring or forbearance on interest and principal repayments. If that number of Rs 2.3 trillion is also included, then NPA ratio is 6 per cent of the GDP. Then there are corporate guarantee delinquencies. If those numbers are also included, then the NPAs could be higher at 8 per cent or humongous Rs 8.5 trillion, an indication that some of the bank loans are actually to ghost entities. At current dollar that would be $177 billion. It could be higher since some infrastructure companies, especially roads, power and ports that are functioning on deferred funding arrangements (Build, Operate and Transfer) are yet to begin debt repayments are yet to begin with moratoriums in place.

When India was growing at 3 and 4 per cent in the 70s and 80s, gross non-performing assets were just 2 per cent of the GDP. At higher growth rates, NPAs also appear to have increased not just in absolute terms as well. Are high insolvency rates a sign of economic progress?

But here is another reality byte! That India's high growth is fiction is apparent when the GNP (Gross National Product) based measure is used. The GNP measure uses net factor income (NFIA) -- income earned by Indian residents on foreign shores. In 2012-13, the GDP growth at factor costs was 5 per cent and 6.2 per cent in 2011-12. GNP growth was 2.8 per cent and 5 per cent for the same period.

The high GDP growth therefore was powered largely by a yawning current account deficit (implying NFIA is negative) that is presently a record high 5 per cent of the GDP. The last time India went to the IMF and pledged gold in 1991, was when the current account deficit was 2.5 per cent of the GDP. The high current account deficit means that the economy is consuming more than it is producing. Indian government economists (spin doctors?) call it "absorption." That "absorption" is driven domestic consumption, investment and government spending. The latter two are not happening. It is only consumption-- energy consumption particularly diesel and coal. The energy is consumed is for powering large cars and air conditioners and other luxury goods in urban areas, therefore is obvious the "absorption" is akin to pouring alcohol down an alcoholic's throat!

Where is the growth?

Only for a few?

Despite the feverish sales pitch and the neo-liberalism of the country's economists, India is back to the 3 per cent growth of the 70s and comes with an added set of problems, almost similar to Latin America in the early 80s! Energy import bills have mounted and ability to meet the payments have deteriorated manifesting in currency market volatility.

Ideally the high growth should have showed up in rising government incomes. After all that was the promise made by India's economist prime minister, Manmohan Singh in 2004. Instead India's tax to GDP ratio has actually dropped, despite the reforms.

It is really strange that a country that boasting of such growth rates has not been able to improve tax collections or compliance. The post reform tax to GDP ratios are just about as good as sub-Saharan Africa. The tax to GDP ratio of India is 8 per cent and has stagnated there since 2004. The tax to GDP ratios were close to 11 per cent during periods when the country was in the so called "Hindu Rate of growth" of 3 per cent during the 70s, and early 80s.

Yet, the weak ratio is not identified as the reason for the fiscal deficits. India's fiscal deficit in 2012-13 was 5.2 per cent of the GDP or Rs 5.21 trillion. When compared with the rest of the world, it is hardly a large figure especially since fiscal deficits are above 8 per cent in most of Europe and in the U S. Unlike in Europe and the U S, however, India has failed to raise tax resources. Raising the tax to GDP ratio to 12 per cent per cent would mean that India would end up with a fiscal surplus.

Such a move though would mean recovering dues from corporate entities like Reliance Industries and a series of companies that have perfected the art of dodging taxes and high powered filibustering of tax recovery. Is low tax compliance a sign of economic progress or is it capitulation to industrial state where corporate autocracy prevails over public interest?

The capitulation in turn implies that fiscal problems are identified as expenditure related and therefore identified for sequestering. The cuts in expenditure have resulted in crumbling social infrastructure and public services, including national security. The result, India has among the worst public services in the world despite all the tall claims of high growth. Female literacy is lower than in Uganda.

Worse, the low tax compliance resulting from capitulating to the powerful corporatocracy means that the state has little funds to meet its own expenditure, let alone make capital investments and generate employment. That has prompted privatization of state owned sectors, a move that could include public services, including water supply.

But has the private sector delivered? So far they haven't. They certainly haven't in both the electricity and roads. They are unlikely to do so in public goods and services services, since the objectives of the state and private investors are completely different. A welfare state's objective is an economic rate of return on investment.  For the Indian private sector, the objective is almost exclusively quick financial returns. That means the private corporate sector's motive is profits and not societal or national progress. For finance capital objectives are defined by dividends and earnings per share – the faster and higher the returns the better it is.

Up to the 10^th plan period, India's focus on the Economic Rate of Return which meant a focus on development and progress. But few in government now mention economic rates of returns. They appear to have completely forgotten the term.. The, focus shift is on the stock markets.That also explains the national media's redirection of attention from national economic issues to corporate results and stock market performance, as if the latter was the beginning and end of economic civilization.

But corporate profits are not necessarily attained by high employment generation. Employment is more an afterthought. 

Take the case of India's. Infosys that has begun to pink slip employees. The reason is a loosely used and undefined term "under performance." Infosys official justification came in January this year that said, "This (reducing workforce) is done regularly and is not a one-time event. We have a robust performance management system that includes structured appraisals and performance feedback."

The real reason is obviously is to squeeze wages to less than subsistence and reduce workforce to servility, not very dissimilar to bonded labour of the pre-independence times. After all supremacy is for stock holder returns even if it means a regression to sweat shops! The sad truth is that sweat shops are no guarantors of high economic growth. Low wages and mounting cost of living are a ticking time bomb!

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