The focus of the government's privatisation drive has shifted to the civil aviation sector. In a move aimed at scorching rumours of dissension within the cabinet regarding its "big ticket" privatisation drive, the Prime Minister reportedly convened, towards the end of May, a meeting of the Cabinet Committee on Disinvestment. That meeting arrived at what amounts to the most far-reaching decision as yet with regard to the nature and thrust of the privatisation process under the BJP-led regime. The government, it was decided, would offload up to 60 percent of its stake in India¹s national flag carrier, Air India. Of this 26 per cent would be offered to a strategic partner who could be from abroad, another 14 per cent to a domestic strategic partner, 10 per cent to the financial institutions and other domestic investors and the remaining10 per cent to employees of the company.
 
Strategic sales of public assets, as defined by the government, are aimed at handing over the management of the company to the private sector. Thus, the move clearly expects an alliance of some kind between interested foreign investors and domestic private investors who, together, would control 40 per cent of the equity in the company after privatisation. Needless to say, in such a tie-up, the foreign investor, who controls the largest block of equity, other than for the government divesting managerial responsibility, would be the determining influence on the operations of the privatised company. A shareholders agreement, to be negotiated as part of the sale, would ostensibly define the relative roles of the strategic investors and the government, which through its own shareholding and that of the financial institutions would still be in control of 50 per cent of equity in the company. As if to allay fears that the government had set the scheme up for a take over of management by foreign investors, the Minister for Disinvestment, Arun Jaitley, issued a clarification. The scheme, he said, allows for the possibility of a domestic investor acquiring up to 40 per cent of equity, provided it had the resources and the technical skills to run the company along competitive lines..
 
The decision on Air India comes in the wake of an earlier decision to divest 51 per cent in the dominantly domestic carrier Indian Airlines, with 26 per cent being offered to a single buyer who, once again, would be handed over the management of the company. The somewhat delayed appointment of a global advisor in the case of Indian Airlines and the appointment of a similar advisor in the case of Air India are to occur soon. This would allow the government to complete the process and garner a part of the Rs. 10,000 crore from disinvestment targeted for in the Budget for 2000-01, well before the March-end deadline.
 
These decisions are indeed surprising for a number of reasons. Most nations have sought to create, and still maintain, a state-owned national carrier (or carriers) flying international and domestic routes on strong economic and social grounds. Principal among these are the need to ensure adequate flights connecting the country concerned to the major airline hubs of the world and the need to connect different centres within the country, even if operating such connections are not in the first instance profitable. International connnectivity and ease of access is crucial especially when a country is attempting to engage international markets and build commercial bridges with the rest of the world. And integration and development without excessive regional inequality very often requires ensuring transportation and communication networks, which in themselves may not be profitable but yield substantial external benefits. In sum, state ownership in the airline industry may be essential from the Œdevelopmental¹ point of view of ensuring connectivity across points between which traffic is low. This is achieved by cross-subsidising unprofitable operations with revenues from more lucrative routes and even accepting an overall deficit which is financed through taxation. A form of support for such cross-subsidisation is the provision of a captive market. Since the various arms of government are themselves major clients on international and domestic routes, diverting that traffic to the state-owned carrier ensures a minimum of revenue along profitable routes, besides reducing foreign exchange outgo from the country. Thus, privatisation of the airline sector, which does away with state control and state support and leaves the decision of which points to connect and at what frequency to be determined purely by the profit motive, can result in economically and socially damaging results in the long run.
 
It need not be true at all that the indifferent financial performance of India¹s publicly owned airline companies arises purely from the social role they have hitherto been called upon to play on these grounds. Part of the reason their financial bottom line is disappointing may indeed be a combination of poor management and excessive governmental intervention. But privatisation as a means to trim the fat is by no means the best answer. To start with, instances where privately-owned firms make erroneous investments decisions or manage companies poorly are legion. The recent experience with private entry into the domestic airlines sector itself is indicative, with many players such as Modiluft and NEPC having burnt their fingers and exited at considerable private and social loss. Further, it is yet unclear how much fat there is to trim in the existing operation of the two airlines.