Can privatising loss making public enterprises be in favour of the Indian Economy?

We, at Economics Harbour, begin with a new series, where we will try relating the theories which we study in our curriculum with the ongoing economic events in the country. This would help in better understanding of economic concepts, and also assist you in writing for various competitive examinations. For this, we need your support. If you have any such article in mind, or would like to write a piece for our blog, do let us know.

The first article is regarding the privatisation of Air India.

The commentary is in response to the article posted by Financial Express, the link of which is given below

Meghnad Desai rightly points out the disadvantages of maintaining Air India under the public sector. The incidence of losses incurred by the enterprise falls directly upon the majority of the population, especially those belonging to the economically lower section, who are already burdened by the regressive tax structure of the country (a higher indirect tax revenue reveals that something is seriously flawed in the economic structure of the country). True, India still is hesitant in privatising the major areas, and it should be, because of the structural problems prevailing in the country. However, Air India should be given away with. With humongous losses, it would add further pressure on the economy, and also on the value of Indian rupee vis-à-vis other currencies. Even if the government tries to bail out Air India, it would inject more currency in the economy thus increasing the supply of money in India. Therefore, at a point when rupee value is already declining in relation to dollar, further injecting more money in the system would only add to the problems by creating inflationary pressures, higher import bills, and thus trapping the economy under the vicious circle of debt.  This pressure would ultimately be borne by the lower and middle classes of income, further widening the inequality gap. Therefore, the government should seriously ponder on easing the terms of disinvestment, as far as Air India is concerned.

Thus, privatizing certain loss making units is not all bad. Indian government should ponder on easing out the terms of disinvestment of Air India. The delay is only adding to the sunk cost of the enterprise, the cost which will be borne by the Indian taxpayer in the end.

Moving onto the Economic Theories:

1. Fischer’s concept of Money supply: Money supply is directly proportional to the Price level. Therefore, if the government tries to bail out Air India, it will inject more currency in the system, thus increasing the money supply, consequently leading to a rise in price level of the country. The brunt of rise in price level will be faced by lower income group.

2. A rise in money supply will lead to fall in the value of rupee, thus making the imports expensive and exports cheaper. However, at present we as a country depend a lot on the petroleum, the demand of which is inelastic. With fall in the value of rupee, will lead to a rise in the total expenditure, thus creating a pressure on the balance of payments account.

3. Regressive tax regime: The major amount of revenue earned by the government is through indirect tax, which in itself is regressive. By regressive tax we mean the amount of tax paid is same by all depending on the consumption, irrespective of the level of income. Therefore, the lower income group for whom the marginal utility of money is high pays the same amount of tax as the higher income group for whom the marginal utility of money is low. This makes the Indian taxation system regressive in nature.


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