Lessons to be learnt

Dismantle artificial barriers between demand-supply and strengthen oversight to nip monopolies

By Mohan Sule

India has always been a difficult place for foreign investors. For every multi-brand retailer like Walmart, who is eager to enter the country to tap the vast market, there is another disillusioned investor like Fidelity Mutual Fund, which wants to exit, frustrated by the maze of regulations that make accessing this huge pool difficult. Recent events have brought this dichotomy in foreign investors’ perception rather sharply. If the Supreme Court’s stinging rebuff to the finance ministry for levying capital gain tax on Vodafone’s acquisition of the stake of Hutchison, another overseas investor, in its telecom joint venture with Essar restored the confidence in India’s slow-moving legal system, the cancellation of all the 122 second-generation (2G) telecom licences issued on first-come-first-served basis in January 2008 has reinforced the view that India is too chaotic a place to do business, with frequent changes in the rules of the game offering no long-term stability. Two showcases of reforms with potential to power the India Growth story — telecom and aviation — have become examples of crony capitalism and the embedded bias against FDI in the political class. Sadly, India today is talked more for its corruption rather than being bracketed with China for its economic power. Nonetheless, some good may come out of the sorry events of the past days if some lessons are learnt. The first is the price of interference in the demand-supply equation can be heavy. The telecom sector is the prime example. There was cap on the number of players in each circle. Licences were issued based on technology. Foreign investors were barred. Eventually, the concept of unified services access was introduced, allowing  services providers to offer services across segments and technologies.The result was a boom in subscriber base as tariffs fell due to competition.

Yet, the awarding of the 3G spectrum shows that inferences from the earlier mistakes have not been drawn. Though the licences were auctioned, players were again restricted to circles. To get over the inability to offer pan India services, providers started inking roaming pacts with each other. This practice has been met with stern disapproval from the industry watchdog. Equally disastrous, says the second lesson, is doling out licences to equity investors masquerading as entrepreneurs rather than to those with the intention to stay and succeed. Selling part or entire stake by almost all those who bagged the 2G licences in the second round (though only Swan Telecom and Unitech Wireless have been charged by the CBI) for huge profit show that arbitrageurs benefit from lack of transparency. This should silence critics who maintain bidding raises the price of the end product or service as those acquiring the rights try to recoup their investment. This gives rise to the third lesson. There is no one-size-fits-all method to sell scarce natural resources. The expenses involved in drilling oil are fairly stable. But exploration rights are auctioned and the producers calibrate crude prices as per demand even while selling it on a first-come-first-served basis. This means even fixed pricing has a variable element. The problem arises when the cutoff is determined not by availability but to accommodate cronies as happened in the telecom space three years ago. Eventually, the corruption of the process proved self-defeating. The large number of entrants jeopardised the health of the telecom industry.

The conclusion that can be drawn is that if the price of the end product depends on demand rather than the cost of production, auctioning is the best method. Eventually, this will lead to levelling of the field, with the cost-efficient surviving the fluctuations in consumption. This leads to the fourth lesson. Imposing physical or financial barriers to limit players is harmful and so also restrictions on mergers and acquisitions, which constitute the market’s search for equilibrium. Second and third tier companies amalgamate to take on the number one player and the leader gobbles up smaller players to achieve economies of scale and stay profitable. This brings to the next lesson. There is need for a strong competition overseer who would step in to ensure that users have a choice in prices, products and services. The European Commission has nixed the proposal of the NYSE Euronext stock exchange and Deutsche Borse to merge for this reason. In India, the Competition Commission has yet to become assertive. Instead of hoping for regulatory or judicial intervention, it is time shareholders become vigilant and nip promoters’ grandiose dreams in the bud. For instance, if institutional shareholders had questioned why real estate companies need to diversify into telecom services, India would have been saved from seeing its image take a severe drubbing.

Mohan Sule

Causes of concern

PSU splurging without reforms, high rates on dollars and absence of long-term visibility on interest rates

By Mohan Sule

During a bearish phase, investors tend to sit out on the sidelines or view it as an opportunity to indulge in selective bottom fishing. Looking at the low volumes on the stock exchanges, it looks like investors are preferring to err on the side of caution. Despite attractive valuations, many stocks are getting ignored. This reflects the lack of confidence of investors that things are going to turn better any time soon. This stems from the pessimism that it would take years for the euro-zone region to revert to its role of an economic powerhouse. The slow recovery in the US is not accompanied by creation of jobs. More than global economy, investors are fretting that the current crisis is not getting the attention it should from the political class. The well-meaning prime minister is busy listening to investors’ woes. His trained mind might even know the answers to the problems. Experts are there to draw up blueprints. Foreign investors are ready to pump in capital. Yet there is hesitation to execute these plans as the solutions call for disruption of the present way of life. Take the power crisis. This has three components. One is the shortage of coal. PSU Coal India has the monopoly but hobbled by the government’s price sensitivity. Facing obstacles in tying up supply at home, companies have to shop abroad. The generation sector is bogged down by delays in permission. The users of the power, the state electricity boards, are incapable of making payments as a large portion of the power they distribute is subsidized or pilfered.

The prime minister and the bureaucrats in the power ministry know what needs to be done to offer relief. But the cure is unpalatable to the political class. Farmers and the poor form a crucial electoral block and have to be wooed with free or cheap electricity. Coal is considered a national resource, and the mining bill makes it expensive for the investor to dig it up. Natural gas to the power generators have to be distributed through quotas and nuclear power generation is stirring political controversies over safety. All these ingredients make up a perfect recipe for chaos. During the Great Depression of the 1930s, US President Franklin Roosevelt embarked on a spending spree by building a network of roadways as a means to provide employment and business to the private sector. After the dot-com bust triggered a bear phase, the NDA government led by Prime Minister Atal Bihari Vajpayee flagged off the ambitious National Highway project, which is bearing fruits now. As the fiscal deficit has overshot its target due to schemes providing employment to the rural poor and selling petrol below cost, the UPA government is no position to embark on another round of fiscal stimuli by way of tax reductions. Even the proposal to cut the securities transaction tax has been scrapped. Instead, cash-rich PSUs have been asked to splurge to boost business confidence. Perhaps the government is hoping that the capital expenditure would get better valuations for PSU shares, thus lifting market sentiment.

It would be interesting to see what answers the PSU CEOs give to the shareholders during next year’s results. These include CEOs of banks, which are offering interest rates on dollars comparable with those on domestic deposits of equivalent tenures. The measure smacks of desperation though it has started producing results: inflows have increased, boosting the rupee. The plight of companies saddled with FCCBs should have made banks cautious. The depreciation of the rupee and fall in stock prices, extinguishing the bondholders’ option of equity conversion, has saddled issuing companies with huge debt. Some of them have had to roll over or incur additional debt to redeem the bonds. With western banks busy with their own problems of staying solvent, Indian companies are in an awkward situation. RCom has turned to a consortium of Chinese banks, providing them indirect access to our telecom sector. The US$1.2-billion credit to refinance the US$ 1.8-billion FCCBs is nearly half in value of the promoters’ 68% holding. Add to this the reluctance of the Reserve Bank of India to offer a long-term view on interest rates though it has been providing estimates of inflation and GDP growth. In the October 2011 credit policy, the central bank noted the peaking of the interest rate cycle but left the reduction timetable to a number of unspecified factors. Of late, the trend is to provide guidance on interest rates at least for a year: the US Federal Reserve has announced its intention to keep the rock-bottom interest rates unchanged till end 2014. This creates a stable environment for investors. Such a courageous move by the RBI would ensure that India attracts quality money from pension funds rather than arbitrageurs.

Mohan Sule

A modest agenda

The budget should aim to create a stable environment for risk taking rather than embarking on ambitious but divisive reforms


By Mohan Sule

Which avatar will Pranab Mukherjee don when he rises to present the budget for the coming fiscal? Will he be the cautious and prudent economist, fretting over the income-expenditure imbalance, or will he be the nifty politician, eager with schemes that will bear fruits in 2014? Manmohan Singh’s appointment as finance minister during the foreign exchange crisis of the early 1990s was widely lauded as it raised the comfort level of lenders and investors. Yet, the same person as prime minister has proved to be ineffective and blamed for the “policy paralysis”. The reasons are obvious. The balance of payment crisis facing the country was so severe that there was no alternative for prime minister P V Narasimha Rao but to let Singh carry on with his work of opening the economy. In contrast, the unexpected defeat of the NDA government and the formation of the UPA government in 2004 were against the backdrop of the India Shining campaign. Its second term began amid buzz of the India Growth story, the country’s resilience during the global turmoil of 2008-09, and its capacity to overtake China in the not-so-distant future if it continued with the same growth rate. Complacency set in and so also the belief that, no matter what, foreign investors have no choice but to come to India. Instead of continuing with the reforms process and setting an example for corporate governance, domestic compulsions overrode economic wisdom. The result? Foreign investors voted with their feet, and the rupee, whose strength at the height of the 2007-2008 bull run had emboldened many professional forecasters to peg the 45 level as its fair value, sunk to below 53 a US dollar, with scary predictions about its future direction.

What does this mean? A professionally qualified finance minister is as good as his circumstances allow him to be. If the job is restricted to balancing the budget, the prime minister can appoint any of the bureaucrats manning the ministry to the post. The person presiding over North Block has necessarily to be a political animal, adept at electoral math. It will not be a big surprise if there is the tightrope walking of balancing subsidies and other non-Plan expenditure with budgeted revenue. At the same time, there is realisation of the limit to instant gratification. The ramifications of the reckless spending by Europe’s PIIGS are still being felt around the globe. The finance minister, therefore, requires sympathy and understanding. He has to be seen responding to the financially weak segments of the economy. At the same time, he understands that creating an atmosphere that encourages investors will be the best help that he can extend. In this situation, the budget maker tries to prioritise, paying attention to areas that need to be addressed on an immediate basis due to the imbalance created by the external environment or their capacity of showing quick returns. The end result is a messy affair, satisfactory to none of the constituents. The coming budget may also disappoint those purists who would want the finance minister to wield the scalpel more forcefully in discarding the fat of subsidies and dole-outs.

The political class sees the budget exercise as one of the means to fulfill some of its promises to the electorate and, during the terminal years of the tenure, to offer blandishments for a repeat from the voters. The investors watch it to gauge the returns that can be expected post the changes in rules. Eventually, for both it boils down to how much risks the budget allows them to take. Reduction in tax rates and scrapping of levies can result in deficit instead of acting a trigger for more productivity. Higher rates of imposts can sap industry rather than provide more revenue. Instead of adding to its popularity, populist schemes can boomerang by triggering inflation or plummeting of confidence in the government. On the other side of the spectrum, the new regime of regulations will be welcomed by investors if it signals a continuation of the past growth policy and not a U-turn for short-term goals. As long as both the constituencies find risk-enabling provisions the budget would seem to have met its objective, notwithstanding tallying the finer details of inflows and outflows. The Direct Taxes Code and the Goods and Services Tax bills, if passed by parliament in the budget session, will create security in the direct and indirect tax structure, which is so essential for risk-taking. The finance minister in essence has not to do much this year except focus on shepherding these legislations instead of trying to ramrod disruptive reforms in banking, insurance and retail. Stability rather than brinkmanship is the need at this juncture.

Mohan Sule

What’s the buzz?

Food security, electioneering, bad loans, interest rate cuts, and M&As are the talking points for 2012

By Mohan Sule

Some countries and companies attract the buzz. Some do not even on trying. For instance, money managers are eyeing Africa as the next big story even as China and India desperately try to remain relevant. Russia is increasingly talked about for its lawlessness in spite of riding an economic boom fuelled by oil prices. Every move of Steve Jobs was monitored with excitement, but does anyone care  who is the boss of Samsung, the largest consumer durables company in the world? Many were prepared to write off Apple after the demise of its flamboyant founder late last year. Defying pessimism, the iconic company is attracting buzz in the blogosphere in anticipation of the third version of its tablet that is likely to be unveiled this month. Will it have the voice recognition software that made its latest smartphone a killer device? There is unanimity among analysts that China is poised to become the largest economy in a decade. At the same time, it is attracting attention for its ‘khoka’ companies and growth driven by investment and exports rather than consumption and its capacity to face an Arab Spring type of revolution. The India buzz centres around policy paralysis as amplified by lack of decision on infrastructure projects and the suspension of foreign direct investment in multiple-brand retail and the anti-corruption movement. With budget day a couple of months away, the expanding fiscal deficit is providing fodder to the chattering class, which is also betting on the central bank embarking on interest rate cuts but is divided on what this will mean for the equity markets in the absence of foreign fund inflows.

Right-wing economists, bankers, corporate honchos and investors may protest, but the Food Security Bill is creating a buzz around the world just as the unique identity project and the cheapest tablet, Aakash. Not only poor nations but even the rich world are watching in awe how India is going to extend the right of cheap food to millions of its hungry citizens. If its execution is as successful as that of the national rural employment gurarantee scheme providing 100 days of wages to the rural poor, Sonia Gandhi is sure to find a place among the pantheon of India’s deities. The buzz is that 2012 marks the beginning of the election cycle for India. Whether the campaigning will go on till May 2014, when the term of the present parliament expires, or ends early hinges on how the Uttar Pradesh results turn out. The low base effect will magnify every additional seat won by the Congress and will be taken as a stamp of approval for the Junior Gandhi-led campaigning. A snap poll could be in the pipeline as the UPA coalition, emboldened by the good showing, might want to break the parliament gridlock created by allies as well as the opposition. The March 2012 budget can provide answers. Introduction of stalled reforms will imply the government’s confidence of lasting the full term. A manifesto couched in a fresh salvo of subsidy programs, however, will signal imminent general election.

The buzz about divestment of PSUs has flared up after Sebi recently tweaked rules to allow companies to offer shares directly on the stock exchanges. The market is talking about the beneficiaries of rural power. Good monsoon, cooling of food inflation and employment programs are being credited for the surge in FMCG stocks. In contrast, the buzz about the IT sector is mixed: the blessing of rupee depreciation is blunted by the uncertainty in spending in the US and euro-zone. The slowdown is likely to see heightened M&A activity. Will troubled portal Yahoo! and Blackberry maker RIM change hands? In India, acquisitions would not be restricted to the telecom sector, which is disappointed by the department of telecommunications opposing the rules proposed by the telecom regulator to facilitate consolidation. Many companies from other sectors that had recklessly taken debt in their quest for expansion and diversification, too, could be on the block and so also some of the casualties of the steep depreciation of the rupee. Exotic derivatives that were supposed to provide a buffer instead have become a burden. The first deal of the year involving a complex web to rescue the drowning TV18 promoters has baffled the market about the real ownership of the media group. The bottom line is the company has replaced one set of lenders with another: RIL. As the buzz about real estate companies’ crash-landing due to pricey properties and huge debt is gaining momentum so is the talk about banks’ soft-landing despite inadequate capital and ballooning bad loans to state-controlled sectors as the government prepares to infuse cash. 2012, thus, will be the year when contradictions play out without anyone blinking.

Mohan Sule

Clash of idea

The India story is grappling with opposing ideologies of welfare schemes v reforms, entitlement v meritocracy, inflation v growth 

By Mohan Sule

The tearing down of the Berlin Wall in November1989 signalled the end of textbook Communism as spelt out by Karl Marx and Frederick Engel and also the Cold War that was triggered after World War II in March 1945. The ideological clash hinged on the best way to prosperity. The developed world credited freedom of choice for its success. In contrast, Communists believed the state had to take care of its citizens by ensuring equitable distribution of wealth. With the disintegration of the Soviet Union, the debate appeared to have been finally sealed in favour of the ways of the west. As it increasingly looked that the world was once again going back to being a peaceful place, bothered about bread-and-butter issues, political scientist Samuel P. Huntington in 1992 disturbed the complacency by warning that another clash was imminent. He explained in detail his thesis in a 1996 book, The Clash of Civilizations and the Remaking of World Order.  Post 9/11, Huntington’s exposition gained gravity.  He predicted India would swing between opposing cultural and religious identities. Looking at the current situation, it looks like India instead is wrestling with an identity crisis of being a superpower in the making to being a perpetually developing economy.

What are the crises that India is grappling with? The notion that elections can be won on welfare schemes guaranteeing employment and food security rather than boosting investment is being severely tested. To run a benevolent state, the treasury has to be in surplus. This is possible only in a booming economy, when tax revenues are buoyant. As it is, the subsidy on petroleum products has been causing a severe strain on finances as crude oil prices are never static and, in fact, tend to rise when demand surges, throwing into disarray all calculations made in the budget document. Another source of revenue is from sale of assets. A good price can be fetched only when the stock market is in a cheerful mood. The bottom line is that even to dole out handouts, the investment climate has to be conducive. In fact, a measure of a country’s outlook is to examine how the assets of the state are used, resources allocated and prices of services and products determined. As is seen from the examples of PSU aviation, banking and oil marketing companies, interference in the demand-supply equation can be at the cost of the health of the supplier. Another controversial idea that has caught the fancy of some people with influence on policy making is to make the private sector pay the bill for social services. Mining companies have to share royalty and profit with those displaced, and the price tag for land acquisition to build factories comes embedded with a premium. The new Companies Act awaiting parliament’s approval mandates a share of profit on social programmes. The best way to make companies conscious of their environment is by recognising that all the stakeholders — clients, suppliers, employees and shareholders — are important. The IT sector offers competitive rates, is run by professional managers, and has turned employees millionaires through stock options. In the bargain it has provided handsome returns to the shareholders. Many IT bosses are active in charity work.

It is also common for policymakers to allow concerns of containing inflation to subvert policies to promote growth. However, this way of thinking met with a neat burial post Lehman Brothers’ collapse in September 2008, when governments announced fiscal stimuli packages and central banks injected liquidity to enable investors to take on risk, which is essential to promote growth. It is now conceded that some amount of inflation is good as it signifies positively on the investment climate, indicating scope for further expansion to match the growing demand. Yet, our Reserve Bank of India has been proclaiming that it is willing to cap growth to bring down inflation. Pricey onions have known to cost an election but not unemployment. So seems to be the muddled reasoning just as promoters grooming their children to occupy the corner cabin feel nothing wrong in keeping a company run on public money family-controlled. Even first-generation entrepreneurs who have made it big are laying the groundwork for the second tier to take over. This practice is equally rampant in politics, mostly in Congress (the next generation of Deoras, Dixits, Scinidas, Pilots, and Gandhis are waiting in the wings), reinforcing the view that in India bloodline counts though royalty has been abolished (by the same party). In contrast, many MNCs, PSUs and even private sector firms are being managed successfully by professional CEOs. Whether India’s growth engine can run without any bumps will hinge on how this clash of ideas is resolved.

Mohan Sule

Crisis and celebration

Why India’s rupee dive and succession at the Tata group should be viewed as opportunities to strengthen their balance sheets 

By Mohan Sule

It takes a crisis to jolt the government into action. In May 1991, with foreign exchange reserves barely enough to meet three weeks of imports, India had to mortgage 47 tonnes of gold with the Bank Of England and 20 tonnes with Union Bank of Switzerland to raise US$ 600 million. The national outrage that followed led to the collapse of the government led by socialist Chandrashekar, resulting in the selection of P V Narasimha Rao as prime minister, who appointed former Reserve Bank of India governor Manmohan Singh as the finance minister. The ‘reformer’ liberalised the economy at the behest of the IMF and not due to his own initiative. This time, the decision, now put on hold, to open multi-brand retailing to 51% foreign direct investment was spurred by the rupee hitting a lifetime low of 52.7 a US dollar on 22 November 2011. Other sectors waiting on the sidelines include insurance, aviation and banking. Global retailers have mastered the art of transporting products from their sources to the consumers at minimum cost. As automation, refrigeration and good roadways are essential ingredients, many supporting industries will benefit. Leveraged organised retailers will get an exit route. It could also boost real estate developers sitting on a pile of inventories. The pop-and-mom shops, whose survival is at the centre of the current storm, should be offered financial assistance to upgrade and not used as votebank. Many of them sit on prime real estate with proximity to consumers that large retailers can never enjoy. The aviation sector is a good example of how a promising industry is in the danger of getting grounded because of the inhibition in inviting foreign investment. The reluctance of the Tatas to start an airline without a foreign collaborator (Singapore Airlines) should have offered hints to the government as well as the Indian promoters  of the difficulty in going it alone.

Like the retail sector, FDI in aviation will help in sprucing up the logistics of running an airline but will not guarantee profit. Otherwise, there would not have been so many bankruptcies in the business, the latest being that of the parent of American Airlines, the last of the legacy US airlines to have survived without undergoing restructuring. Yet there is no luxury of choice. The diminishing attraction of India to foreign investors and the resultant increase in inflation, embedded in the import bill, should speed up the unlocking of the residues of a bygone era. The fear of foreign ownership compromising India’s security had been raised while allowing foreign equity in the telecom sector. This apprehension seems to have ebbed now. Vodafone’s Indian operation is majority owned by the British company after buying out the Ruias of Essar. Uninor, a joint venture with Unitech of India, has nearly 67% stake by Telenor of Norway. In fact, fending the united opposition to FDI in retail and other sectors could be a test case for prime minister-in-waiting Rahul Gandhi, who so far has displayed poor judgment  (the anti-investor land acquisition bill has his stamp) and tends to keep aloof from national crises (Lokpal, terrorism, inflation, economic slowdown).

Rajiv Gandhi realised the importance of computers, despite resistance from trade unions, for India’s growth. A window has opened for his son to rebrand his left-of-center image by convincing the skeptics that reforms rather than a food security law or rural employment schemes are the best option for inclusive growth. On his success in this battle will hinge his smooth succession. The painless passing of the baton from the CEO to his successor is always a cause for celebration. The mood, however, was subdued at the recent Bombay House transition. For one, the successor to Ratan Tata is untested apart from helping manage his father’s construction business. Doubts persist about his ability to steer a conglomerate, which has acquired the complexion of an MNC. Tata, too, had no experience when he took over in 1981. That was a different era, when Indian industry was untested by foreign competition. To his credit, he consolidated the group’s global credentials through acquisition of well-known brands. Cyrus Mistry does not have to face the kind of dissidence Tata had to encounter from powerful chieftains, resulting in the unceremonious exit of Tata Steel boss Russi Mody. Nonetheless, there is disappointment at the missed opportunity of paving the way for a professional CEO instead of appointing the son of the largest individual shareholder. Perhaps that was the reason the market has decided to wait and watch rather than react hastily either way. What will be seen is if Mistry follows the footsteps of his predecessor, who divested loss-making businesses like textiles and computer hardware, by shedding some expensive properties.

Mohan Sule

Chalk and cheese

The troubled aviation sector can learn survival skills from the embattled telecom sector

Mohan Sule

After telecom and mining, another showcase of the reforms era is in the news for the wrong reasons. Unlike the telecom and mining sectors, the aviation sector has hit an air pocket not because of any scandal but due to operational deficiencies. Yet, just like the telecom and mining sectors, the problems of the sector can be traced to policymaking and the players’ ambition to gain market share. The open-sky policy introduced in the early 90s allows anyone with a borrowed aircraft or two to start an aviation company and fly on any domestic route with a serviceable airstrip by paying the fees for landing rights. It was the promoters’ headache to work out the math of balancing the cost of aviation turbine fuel, servicing the lease, maintaining the fleet and staff wages with passenger fares. In contrast to telecom and mining, which are considered basic businesses with little value addition to differentiate one player from another, the aviation industry has been associated with glamour and adventure right from the times of the eccentric aviator Howard Hughes. Even our own JRD Tata achieved a larger-than-life image not merely by making steel and producing commercial vehicles but after his triumphant return from a solo flight from Karachi to Mumbai via Ahmedabad  in a Puss Moth aircraft in 1932 before launching Tata Aviation, which later became Air India International. Not surprisingly, airlines till the end of the last century spent huge amount of money to build brands and loyalty.

The first batch of private sector aviation players was a motley crowd of poultry farmers, unknown entities alleged to be fronts for underworld elements, wheelers and dealers sensing another opportunity to earn returns, and industrialists keen to diversify. In the process, they failed to interpret the market signs correctly. The market was no doubt expanding. The emerging middle class wanted an option to the rickety services offered by Indian Railways. A diet of subsidized fares had hampered the domestic state carrier’s capacity to expand. There was, however, a limit to the premium first-time fliers were willing to pay for better services. Competition on the trunk routes resulted in fare war as in the telecom sector. There was incipient demand for feeder routes. To break even, it was essential that the aircraft had a minimum number of passengers per flight. To ensure this, there was no alternative for the new entrants but to woo the budget-conscious travellers. Among the casualties of this realisation was Damania Airlines, whose promoters were not adequately capitalized to sustain a fancy airline. Sahara Airlines decided to sell to Jet Airways, and Air Deccan to Kingfisher. Low-cost carriers SpiceJet and IndiGo gained popularity. Despite the consolidation and increase in passengers, airlines have not been able to stem the flow of red ink due to the surging prices of ATF, with crude oil crossing the US$100 a barrel in 2008. The brew turned potent on volatility of the dollar following the sovereign debt crisis in Europe and the hardening of domestic interest rates.

A striking feature of the current turbulence in the aviation sector is its similarity with the problems of the telecom sector. One is the wafer thin revenue per user. In spite of being among the fastest growing and the largest in the world, both the industries are not making profit even as they are gaining more users. This means there is demand for the service provided but the economics of providing the service is not viable. Telecom companies have halted the race to offer airtime at throwaway prices. Instead they are concentrating on the creamy layer to ensure decent usage. Airlines either have to follow the no-frills model or use the heavy rush on the metro routes to subside flights to tier I and II cities. Another option is pooling ground services or to carve up the feeder routes among themselves. Telecom services providers are sharing tower resources and till recently were inking 3G roaming pacts with those in other circles to provide users a seamless experience. At the same time, there are two glaring irritants that are unique to the aviation players. One is the subsidy provided by the Central government to Air India to keep its fares low. This provides a benchmark for passengers to compare private airlines. The second, and crucial, cause of grief is ATF. One way to tide over the problem would be to have a variable component in the air fare, linked to the fluctuation in the previous day’s crude price. After 9/11, may top-of-the-line airlines including Swiss Air and US carriers Delta and United Airlines went bankrupt, sending out a clear message that the era of discount flying is here. This means airlines like telecom services have become commodities rather than brands.

Mohan Sule