Month: May 2016

It’s Time Govt Admits, It Does Not Know How to Run Air India

Air_India_001

In yesterday’s column on Air India I made a rather silly mistake, which I want to correct here. For the year 2015-2016, the government run airline made an operational profit of Rs 8 crore.

Using this data point, I said that for 2015-2016, the government wouldn’t have to pour any more taxpayer money into Air India. This is incorrect primarily because I assumed operational profit to be the same as net profit.

Anyone who has studied Finance 101 knows that operational profit and net profit are two different things all together. Operational profit is the profit that a company makes from its business operations. After this, the company needs to pay interest on its debt, as well as taxes to the government. What remains is the net profit.

While I shouldn’t have made a silly mistake like this, I am glad I did because it allowed me to dig deeper and come across some more data, which makes my point even stronger. This data came from two written replies that the minister of state for civil aviation Mahesh Sharma recently provided to the Lok Sabha.

In 2015-2016, Air India made a net loss of Rs 2,636 crore. This means that between 2010-2011 and 2015-2016, the airline has made a total loss of Rs 34,689.7 crore. And that is not a small amount by any stretch of imagination.

 

YearLoss (in Rs crore)
2015-20162,636
2014-20155,859.1
2013-20146,279.6
2012-20135,490.1
2011-20127,559.7
2010-20116,865.2
Total34,689.7
Source: Public Sector Enterprises Survey and Ministry of Civil Aviation

 

Given the loss of Rs 2,636 crore, this means that the government would have had to pour money into Air India in 2015-2016. In fact, until March 2016, the government had already poured Rs 22,280 crore into Air India. For 2016-2017, an equity infusion of Rs 1,713 crore has already been approved.

The question to ask is how has the airline managed to bring down its losses to Rs 2,636 crore from Rs 5,859.1 crore in 2014-2015? The minister of civil aviation Ashok Gajapati Raju, told the Lok Sabha that the airline was able to cut operational expenses by almost 11% during the course of the year and that helped it run an operational profit of Rs 8 crore.

That is just a part of the answer and a very minor part to boot. Let’s look at some more numbers

Air India2012-20132013-20142014-20152015-2016
Year
Total revenue18,213.7920,140.5920,606.2721,315
Total expenditure23,703.9526,420.1926,466.1823,951
Net Loss-5,490.16-6,279.6-5,859.91-2,636
(in Rs crore)
Source:  From a written answer provided by Mahesh Sharma, the minister of state for civil aviation, to the Lok Sabha.

 

As can be seen from the above table the total revenue of Air India has been growing at a very slow pace since 2012. In fact, between 2014-2015 and 2015-2016, the airline managed to increase its sales by just 3.4%.

This isn’t surprising given that it continues to lose market share. In 2013-2014, Air India had a domestic market share of 19%. Since then, it has fallen to 16%(as of February 2016). The airline continues to have a brand image problem and is the airline of preference of a very few people.

That apart, the airline has managed to bring down its expenditure by 9.5% or by Rs 2,515.2 crore, between 2014-2015 and 2015-2016. The question is how has this happened? The simple answer to this lies in the fact that jet fuel prices have fallen during the course of the last financial year and the airline has benefited tremendously because of it.

As I had mentioned in yesterday’s column, in May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

Further, a March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

What does this mean? The company saved Rs 2,500 crore because of lower fuel costs. And how much did the total expenditure of the airline fall by? Rs 2,515.2 crore, as I calculated earlier in the column.

Hence, the expenditure of the airline has fallen primarily because of lower fuel prices. And this has allowed it to make lower losses and at the same time make an operational profit. The numbers make me wonder what operational efficiency was the civil aviation minister talking about.

Further, lower fuel prices are not within the control of the airline. And as soon as prices start to go up, the airline’s losses will start to increase as well. And the meagre operational profit will turn into a loss.

In his reply to the Lok Sabha, minister of state for civil aviation, Mahesh Sharma, has offered a range of reasons as to why Air India makes losses. High fuel prices are one reason. This impacts all airlines and not just Air India. If high fuel prices were an issue, how did Indigo make profits all these years? Further, this cannot be reason for 2015-2016, when jet fuel prices have fallen dramatically.

Sharma also offers other reasons for the non-performance of the airline. One reason offered is high airport usage charges. These charges are not just borne by Air India, other airlines shell it out as well, which in turn is recovered from the end consumer.

Sharma then tells us that competition from low cost carriers is another reason why airline is losing money. But this is true about all other airlines which are operating. The competition is not just specific to Air India.

This also brings out another important point regarding competition and the lack of success of public sector enterprises. As Dwijendra Tripathi writes in The Oxford History of Indian Business: “The profits before interest and taxes as the percentage of capital employed in the public sector remain on an average very low…Few of the profit-making units were operating in a competitive framework; the bulk of the profits came from companies operating in sectors in which the public sector employed a near monopoly position.”

This is a point made in the latest Economic Survey as well. As it points out: “The Indian aviation and telecommunication sectors of today are unrecognizably different from what they were 20 years ago, with enormous benefits for the citizens. Public sector companies now account for a small share of the overall size of these sectors.”

Long story short—when public sector enterprises face any sort of competition from the private sector, their best days soon get over. Air India is a brilliant example of that.

Sharma in his reply also blames the weakening of the Indian rupee for extreme losses. Jet fuel has to be imported and if the rupee weakens against the dollar, the cost of jet fuel also goes up. Nevertheless, this is a risk faced by every airline in the world which does not earn a major portion of its revenues in dollars, and is not just specific to Air India. Also, there are ways an airline can go about hedging these risks.

The point being that Sharma comes up with many reasons except for the fact that the government does not know how to run an airline. Or should a government be running an airline in the first place? Well, if it can make condoms, it can sure run an airline.

And honestly, any other minister, in his place, would have come up with the same set of excuses. The fact of the matter is that a civil aviation minister without Air India coming under him, would essentially be rendered useless.

To conclude, as I said yesterday, the Rs 8 crore operational profit, will be used as an excuse to show the revival of the airline and keep it running. Nevertheless, as soon as fuel prices start to go up, losses will increase. The taxpayer will continue to bailout the airline.

Rest assured!

The column originally appeared in the Vivek Kaul Diary on Equitymaster

Air India Has Turned Profitable and That’s Got Me Worried

Air_India_001

Air India, the airline owned and run by the government, has made an operational profit of Rs 8 crore during 2015-2016.

The minister of civil aviation, Ashok Gajpathi Raju, said this in the Lok Sabha last week. The airline was able to cut operational expenses by almost 11% during the course of the year, the minister added.

For an airline which has been facing huge losses over the years, this is good news. Take the look at the following table.

YearLoss (in Rs crore)
2014-20155859.1
2013-20146279.6
2012-20135490.1
2011-20127559.7
2010-20116865.2
Source: Public Sector Enterprises Survey32053.7

Between 2010-2011 and 2014-2015, the airline faced total losses of a whopping Rs 32,053.7 crore. In fact, even in 2015-2016, the airline is expected to make a net loss of Rs 2,636 crore, though operationally it has made a profit.

Having said that, an operational profit of Rs 8 crore will now be used as an excuse to keep the airline running. In the years to come, more money is likely to go down the drain in trying to keep the airline up and running. In fact, the minister of state for civil aviation Mahesh Sharma told the Rajya Sabha yesterday that the government has no plans of disinvesting Air India.

It is important to ask here as to why Air India made a profit in 2015-2016, after having lost loads of money in the previous years. One reason as Raju pointed out in the Lok Sabha has been operational efficiency.

What the minister did not say was that a major reason for the turnaround has been lower oil prices. In May 2015, the jet fuel price was $1.84 per gallon. By March 2016, this had fallen to $1.07 per gallon. In fact, the price was even lower at $0.93 per gallon in January 2016.

A March 2016 PTI report quotes an Air India official as saying that in 2015-2016, the fuel bill of the company would be around Rs 5,700 crore, which would be lower in comparison to the Rs 8,200 crore bill that the company ran up in 2014-2015.

Further,  the Mint newspaper quotes aerospace journalist Hormuz P. Mama as saying: “I feel that Air India’s improved performance is almost entirely due to the very low jet fuel prices. There does not seem to be much of a turnaround effort in place.”

The jet fuel price is beyond the control of the Air India management. When the price starts to go up again, Air India will be back to making losses. But then the taxpayer is always there to foot the bill. Also, it needs to be pointed out here that as on March 2015, the airline already had a debt of Rs 51,367 crore. The airline was also given a lifeline of Rs 30, 231 crore lifeline by the government in 2012.

Air India is a symbol of all the taxpayer money that the government wastes to keep loss making public sector enterprises going. In fact, when it comes to the quantum of losses Air India is number two behind Bharat Sanchar Nigam Ltd, which made losses of a whopping Rs 8,234.09 crore in 2014-2015. The company has made losses of Rs 23,138 crore between 2012-2013 and 2014-2015.

As the Public Sector Enterprises Survey 2014-2015 points out: “Amongst the top ten loss making companies, Bharat Sanchar Nigam Ltd., Air India Ltd., and Mahanagar Telephone Nigam Ltd. were the top three loss making CPSEs during 2014-15. The top ten loss making companies claimed 85.45% of the total losses made by all the (77) CPSEs during the year. The top three loss making CPSEs namely, Bharat Sanchar Nigam Ltd, Air India Ltd. and  Mahanagar Telephone Nigam Ltd incurred a loss equal to 62.09% of the total loss of all loss making central public sector enterprises in 2014-15.”

These losses are borne by the Indian government. In fact, if you look at the table carefully, the fourth largest losses of Rs 2,164 crore were made by a company which makes photo films. Yes, you read it right.

Why should this government or for that matter any government lose more than Rs 2,000 crore in a year, making a product, which doesn’t have any utility left in this day and age? I really don’t have an answer for that.

It isn’t exactly that the government of India is floating around with a lot of money at its disposal. To give you a sense of comparison, India’s agriculture budget in 2015-2016 was Rs Rs 15,809 crore. This was lower than the total losses faced by the seventy-seven public sector enterprises.

In fact, it was lower than the total losses of Rs 16,987 crore faced by the top three loss making enterprises—Bharat Sanchar Nigam Ltd, Air India and Mahanagar Telecom Nigam Ltd. Now who needs more money? Indian agriculture or the few lakh employees employed by these loss making firms?

Hence, the government spends thousands of crores of rupees every year to keep running the loss-making companies, in order to sustain the livelihood of around 2.5 lakh people working in these companies.

The question is why is the government mollycoddling 0.02% of the nation’s population, when the money going towards sustaining the losses of these companies can easily be better utilised somewhere else.

This is basically a crime in a country as poor as India is. As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads To Disaster: “As a society grows richer it can afford more illusions, more entertainments, more re-distribution of wealth, more regulation, higher taxes, and more unproductive people.”

Right now India cannot afford the huge bunch of unproductive people working at public sector enterprises being subsidised by the government. Further, every rupee that goes towards sustaining these companies is taken away from something else.

Of course, loss-making or not, every minister likes a few public sector enterprises under him. Take the case of the Civil Aviation minister, how much value would he have with Air India not continuing to be government owned? Or how much value would the telecom minister have without MTNL and BSNL, the two government owned telecom companies, continuing to be government owned.

Hence, understandably there is a resistance at the level of ministers in the government as well as bureaucrats, to the entire idea of privatisation. But then in economics there are no free lunches, and someone has to pay for it.

Postscript: In the original column I had said that an operational profit of Rs 8 crore would mean that the government will not have to pump any more money into Air India. That is incorrect. The airline has made a net loss of Rs 2,636 crore in 2015-2016, which means taxpayer money will go into the airline and which actually makes the situation much worse, with almost all the drop in losses coming in from the savings on fuel costs.

The column originally appeared in the Vivek Kaul Diary on May 11, 2016

More to GDP Than What Just Media Talks About

GDP_per_capita_(nominal)_2015

Even if you are the kind who avoids reading business as well as economic news, you can’t avoid coming across the term GDP or Gross Domestic Product, time and again. If the GDP goes up at a fast rate, the economy is doing well. If the GDP doesn’t go up as fast as it is expected to, the economy is not doing well. And if the GDP contracts or falls, then god help us!

At least this is how the mass media talks about the GDP.

But what is the GDP? John Lanchester defines the term in How to Speak Money as: “The measure of all the goods and services produced inside a country.” It is a sort of a measure of the economic size of any country. Changes in GDP measure economic activity.

The trouble is that, at the end of the day it is a theoretical construct and there are problems with it. As Lanchester writes: “Many good things don’t contribute to GDP and many bad things do. The famous-to-economists example is divorce: when people get divorced they pay lots of lawyers’ fees. This adds nothing to anybody’s happiness except the lawyers’, but it adds plenty to the GDP.”

Then there is the problem of how to go about measuring the services part of any economy. As Diane Coyle writes in GDP—A Brief but Affectionate History: “The main input in a services business is the time spent by the employees on their job. What is the output of a teacher, though? Number of children processed through school? The average grade they attain on leaving? The highest subsequent qualification the children attain on average, or perhaps their lifetime earnings?”

Of course, these are not easy questions to answer. Then there are many other things that the GDP overlooks. As Rutger Bregman writes in Utopia for Realists: “Community service, clean air, free refills on the house – none of these things make the GDP an iota bigger. If a businesswoman marries her cleaner, the GDP dips when her hubby trades his job for unpaid work.”

The point being that GDP does not take into account unpaid work. As Bregman writes: “Or take Wikipedia. Supported by investments of time rather money, it has left the old Encyclopaedia Britannica in the dust – and taken the GDP down a few notches in the process.”

A lot of other unpaid work from cooking to babysitting to breast feeding children, which form a major part of daily lives, goes unmeasured as well. One reason for this might lie in the fact that a lot of the free unpaid work is carried out by women. As Coyle writes: “Generally official statistical agencies have never bothered – perhaps because it has been carried out mainly by women.”

Further, GDP does a very bad job of measuring advances in knowledge and technology. As Bregman writes: “Our computers, cameras and phones are all smarter, speedier and snazzier than ever, but also cheaper, and therefore they scarcely figure. Where we still had to shell out $300,000 for a single storage gigabyte 30 years ago, today it costs less than a dime.” Also, free products like Skype, which make our lives a tad easier, lead the GDP to contract.

Also, it is worth remembering that any sort of destruction adds to the GDP. As Lanchester writes: “Your house has just burnt down, and you’ve lost everything. That’s too bad; on the other hand, it’s great for GDP, because you’re going to have to rebuild it and re-buy all your stuff.”

This is precisely what happened to Japan after the Sendai seaquake in March, 2011. The total damage estimated by the World Bank was estimated to be around $235 billion. Nevertheless, things soon started to improve.

As Bregman writes: “After a slight dip in 2011, the following year saw the country’s economy grow 2%, and figures for 2013 were even better. Japan was experiencing the effects of an enduring economic law which holds that every disaster has a silver lining – at least for the GDP.”

The point being, there is a lot more to the GDP, than the media talks about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on May 11, 2016

 

Why Are We Not Talking About Bad Loans of LIC?

LIC

On April 21, I wrote a column titled, Why It’s Best to Stay Away from Buying LIC Policies. One feedback I got on the social media, primarily from insurance agents trying to sound intelligent, was that, if we don’t have the Life Insurance Corporation(LIC) of India, who will carry out socially responsible investing.

None of these agents bothered to define socially responsible investing. But assuming that they know what it means, let me give you a very good example of what is definitely not socially responsible investing.

Let’s take the case of ITC, a company which still makes a bulk of its money from selling cigarettes. As of March 31, 2016, the LIC owned 14.39% stake in the company. As of yesterday i.e. May 9, 2016, this stake was worth Rs 37,510 crore.

What is a socially responsible insurance company doing by staying invested in a cigarette maker? In fact, in the recent past, this cigarette maker opposed the decision of the government for a larger pictorial warning on the cigarette packets.

Can these insurance agents who believe that LIC is into socially responsible investing tell the world at large what is India’s largest insurance and investment company, hoping to achieve by staying invested in a company which sells the stick of death?

Also, it is worth remembering here that the money that LIC manages and invests, are the hard earned savings of millions of Indians. And given the situation it should be managing this money in the best possible way.

But is it doing that? Take a look at the following table.

DateGross non-performing assets ratio
December 31, 20154.23%
December 31, 20143.98%
December 31, 20134.09%
December 31, 20122.97%
December 31, 20111.34%

 

What the above table clearly shows us is that the gross non-performing assets of LIC or bad loans, have gone up dramatically over the last five years. As on December 31, 2011, the bad loans had stood at 1.34% of the total debt portfolio of LIC.

Since then the bad loans have jumped to 4.23% of the debt portfolio of LIC. LIC buys corporate bonds and lends to the central government as well as state governments, municipalities, state electricity boards, state road transportation companies and so on.

The latest loan portfolio of LIC is not available. What is available is the loan portfolio as on March 31, 2015. This data is available in the 2014-2015 annual report of the firm. As the annual report points out: “The non-performing assets as at 31st March, 2015 are Rs12,213.37 crores out of a total debt of Rs 3,70,625.89 crores…The percentage of gross non-performing assets is 3.30%.”

The bad loans of LIC as on March 31, 2015, had stood at 3.30%. Nine months later as on December 31, 2015, they had jumped by 93 basis points to 4.23% of the total debt portfolio. One basis point is one-hundredth of a percentage.

This is a huge jump over a period of just nine months. Now compare this to the bad loans of public sector banks, which have been in the news for a while now. The State Bank of India, the biggest public sector bank reported a bad loan ratio of 5.1% of its loans, as on December 31, 2015. Syndicate Bank and Vijaya Bank reported bad loan ratios of 4.6% and 4.32%. The private sector ICICI Bank reported a bad loan ratio of 4.7%.

While the bad loans of banks have been much discussed, no such discussion seems to be happening around the bad loans of LIC. Other than an analytical piece in the Mint by Ravi Krishnan, and one newsreport in The Hindu Business Line, nothing much seems to have been written around the issue.

To put things in perspective, the loan book of LIC is pretty big. As The Hindu Business Line puts it: “LIC’s total debt” of about Rs 3,70,625 crore as of March 2015, is actually higher than HDFC Bank’s loan book of about Rs 3,65,495 crore in the FY15 fiscal.” The newspaper goes on to report that LIC has filed cases against around seventy defaulters.

While the Reserve Bank of India, the regulator of banks, seems to be taking an active interest in helping banks clean up its act, the insurance regulator, the Insurance Regulatory and Development Authority of India(IRDAI) hasn’t said anything on this front in the public domain. This is not surprising given that a former chairman of LIC is the current chairman of the insurance regulator IRDAI.

It needs to be mentioned here that LIC has the backing of the government, like the public sector banks, and hence, there is nothing to worry about. But ultimately, like has been happening with the public sector banks, the tax payers are there to pick up the tab, if the situation does spiral out of control.

The column originally appeared in the Vivek Kaul Diary on May 10, 2016

What Do Car Sales Tell Us About Black Money?

car

All through last week I wrote on the data put out by the Income Tax department sometime back. This is perhaps the last column based around the data.

Take a look at the following table. I know it’s a very large table, but it’s important to reproduce it here. The table gives the details about individuals who pay income tax in India. This is for the assessment year 2012-2013. The income tax returns for the income earned during 2011-2012 were filed during 2012-2013.

RangeNo of returnsSum of tax payable (in Rs crore)
<0240
= 0162,47,598
>0 and <=1,50,000111,28,41923446
>150,000 and <= 2,00,0003,02,3395254
>2,00,000 and <=2,50,0002,14,4374790
>2,50,000 and <= 3,50,0002,64,9907818
>3,50,000 and <= 4,00,00086,7013243
>4,00,000 and <= 4,50,00069,0772930
>4,50,000 and <= 5,00,00058,2412762
>5,00,000 and <= 5,50,00048,1972527
>5,50,000 and <= 9,50,0001,78,65412580
>9,50,000 and <= 10,00,00010,5061024
>10,00,000 and <=15,00,00063,8767746
>15,00,000 and <= 20,00,00030,0165171
>20,00,000 and <= 25,00,00016,7953740
>25,00,000 and <= 50,00,00029,88110229
>50,00,000 and <= 1,00,00,00011,0777474
>1,00,00,000 and <=5,00,00,0005,0428907
>5,00,00,000 and <=10,00,00,0002661788
>10,00,00,000 and <=25,00,00,000901393
>25,00,00,000 and <=50,00,00,00021707
>50,00,00,000 and <=100,00,00,0008590
>100,00,00,000 and <=500,00,00,0003437
Total number of individuals who filed income tax returns287,66,258114556
Total number who paid tax125,18,660car

In the assessment year 2012-2013, around 2.88 crore Indians filed income tax returns. Of this nearly 56.4% or 1.62 crore did not pay any income tax. The rest, that is, around 1.25 crore individuals paid income tax.

Of the 1.25 crore who paid income tax, nearly 1.11 crore individuals or 89% paid an income tax of less than Rs 1.5 lakh, for the assessment year 2012-2013. In total, these individuals paid an income tax of Rs 23,446 crore. This works out to an average of Rs 21,069. Of course, the median tax paid would be even lower than this.

Hence, 89% of those who paid tax in India in the assessment year 2012-2013, paid an average income tax of just over Rs 21,000 for the year. This means an average income tax of less than Rs 2,000 per month.

This means around 14 lakh Indians (13.90 lakhs to be precise) actually got around to paying some income tax. They paid around Rs 91,110 crore of income tax in total.

It is safe to say here that the average Indian does not pay income tax. Now let’s compare this to some consumption numbers. Take the case of car sales. In 2011-2012, around 25.34 lakh cars were sold.

What does this tell us? In a country where around 13.90 lakh individuals actually pay some income tax, 25.34 lakh cars are sold during the course of the year. In fact, the number of cars sold has continued to be in the range of 23.4-25.6 lakh cars a year, since then. This basically tells us that many people who are buying cars are not paying any income tax.

This could be because of two reasons. One reason could be that those earning income from agriculture, which is tax free, are buying cars. The other and the more likely reason is that cars are being bought with money on which income tax has not been paid i.e. cars are being bought with black money.

Also, if we look at the income distribution of the salaried individuals paying income tax, around 20.2 lakh people had declared incomes between Rs 5.5 lakh and Rs 9.5 lakh, in the assessment year 2012-2013. But the total number of cars sold during the year stood at greater than 25 lakhs. It is safe to say here that those buying cars are earning at least Rs 5 lakh per annum. The question is, who is buying these cars then?

In short, it is safe to come to the conclusion that a significant portion of the cars are being bought by those who have black money.

The good news is that it shouldn’t be very difficult for income tax authorities to figure out who these people are, given the information technology infrastructure that is available these days. Of course, it may not be feasible for them to go after each and every such individual.

The column originally appeared in the Vivek Kaul Diary on May 9, 2016