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Category Archives: India

Is the sky falling down on the aviation sector?

We all fall down ?

You don’t have to follow Vijay Mallya’s tweets to know that the aviation sector is in trouble.  There is trouble brewing everywhere in the industry which had shown great signs of promise since the liberalization of the sector in 2003.

Let’s look at the state owned Air India first.  Sometimes I watch things on the news and I hear Ron Paul’s words ringing in my head. I don’t even believe in his kind of economics, but the state of the public sector in India is such that sometimes you’d think even a homeopathic dilution of the kind of libertarian thoughts I see around me now would be a welcome change in the scenario.

I am looking at Air India’s financial statements as I speak, and really folks it is not all about high fuel prices , what I have with me is the Annual Report from 2009-10. I do not know why later versions are not available on the site.

This is a quote from the annual report for 09-10, which makes it clear that the problems run deeper than high fuel prices. It is mismanagement coupled with deception.

“Operating expenses declined by Rs 23,157.8 million due to a decrease in fuel prices by 29%”

They go on to say how this and other declines in operating expenses were offset by increases in expenses largely due to interest paid on newly acquired aircrafts and borrowings for working capital.

It’s true that fuel prices have since shot up, but it is also clear that while fuel prices are exacerbating Air India’s problem, they are also serving as a carpet under which more endemic defects are being swept under.

Attached with the Annual report is the Comptroller and Auditor General Review of the Annual Report.  Back in 2010, the CAGR has stated that AIR India understated their losses by around 54 percent. A couple of instances have been highlighted by the Auditor.

1)      Air India has been recording its maintenance expense as prepaid expense. That is, the lump sum the company pays for maintenance is recognized as expenditure and deducted from the revenue only when the maintenance work is actually carried out. While this may seem fair at the first glance, the auditor points out that as the need for maintenance is accrued for the hours already flown by the aircrafts, and not when the work is actually carried out. This is an expenditure that has already occurred and should be recorded as such.

2)      Deferred Tax Assets – These are assets which would be recognized as tax credits on future income, but to claim them as assets, there has to be a possibility of taxation in the future, that is the company should have some profits in the future which are taxable. There was no reason to believe that such profits would arise making the entire deferred tax assets phony.

Which brings us to the question of why the government is in the business of running an airplane business in the first place? Many arguments are being made including one that Air India connects remote areas of the country which private operatory wouldn’t cover.

Does such coverage have to come at the expense of huge losses to the tax payer? Does the entire badly managed business which has never known how to survive any kind of competition let alone the fierce competition seen in the civil aviation sector today have to maintained for this purpose? If a certain route is indeed that important, wouldn’t subsidizing a private player to fly that route be more efficient an idea? About the employment Air India generates, remember that the employees haven’t been paid for over quarter of a year now. How long are these operations going to be maintained on the shoulders of a purely welfare claim which also they fall short to achieve?

Looking at the entire market place, we see that it isn’t just the public sector but also the private sector which is in trouble.  Since the liberalization in 2003, which allowed private players in civil aviation, competition in the sector has been intense, with each player looking out for itself by slashing prices despite rising fuel prices and vying for the most profitable routes (except Air India ? )

Air India does not have the same incentives to maintain profitability as the private sector has, so it isn’t surprising that the government has been accused of pulling Air India out of profitable routes and allowing the private sector airlines to fly them. If there is no incentive to run a profitable business, why run it at all? Just for a few under the table deals and kickbacks that the collusive moves provide to someone high up in the bureaucracy? The tax payer money being lost here, in all probability belongs to an honest lower middle class Indian who may never even see the skies from the comfort of a plane seat.

Kingfisher’s troubles are a well-known fact. A luxury airplane in a price sensitive economy where competition was driving abnormal profits to zero! I guess nobody cared about in-flight entertainment or ‘personally selected’ airhostesses for their two-three hour flights; they just wanted to get going at a low price.  The highly leveraged buy-out of Air Deccan to create simultaneous low-cost operations did not work out too well either. It was badly timed with competition from Jet which acquired Air Sahara, sky rocketing fuel prices and the 2008 recession which did not bode well for any of the players. Indigo has stood through in this environment as a lone example of success, driven by well thought of strategic decisions in fleet acquirement and slow and steady expansion into the market. These however are examples of a competitive market doing what it does best, rewarding better decision making. What Air India which doesn’t even pretend to be interested in a profit is doing flying around with these players is beyond me.

Also why are taxes on fuel as high as thirty percent with an additional surcharge when the sector is clearly struggling? Why is Foreign Direct Investment ok in retail but not in aviation? It is easier to see why FDI in aviation would be a good thing. Another area worth looking into would be the high charges paid by carriers for using airport facilities.  Unless the private sector is given the leeway it requires, the liberalization of the aviation sector may come to nothing and people will once again be faced with air travel being a luxury for the very rich.

 
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Posted by on April 2, 2012 in Economics, India, National, Politics

 

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Dinesh Derailed

Dinesh Trivedi just presented a Railway Budget. He also got fired. What happened? Well, he wasn’t ‘populist’ enough that’s what happened. He apparently did not keep the best interests of the ‘aam admi’ (common man) in mind while deciding to hike fares.

Didi wants Dinesh to step out.

Mr Trivedi proposed a series of increases in Rail fares cutting across classes. The increases he proposed were given out as paise per kilometer. The opposition accused him of misrepresenting in paise what would actually be sizeable increases in passenger fare. Well here is the truth behind it, a paise/kilometer increase makes a lot of sense! The increase in rates has not been uniform across classes, for the suburban trains most indispensable for the common man, the increase comes up to Rs 2/100 kms. How many people use suburban trains to travel a 100kms? Only those people would face even a Rs 2 increase in their fares.

One thing that stands out clear is that while many support Mr Trivedi’s budget given its strong emphasis on safety , modernization and a reduction in the operating ratio, all dire requirements for the railways, very few oppose the fare increases as a whole. Not even Trinamool Congress Leader Mamta Bannerjee or her sidekick Derek O’Brien (He should have stuck with his know it all school kids at the Bournvia Quiz Contest) are opposed to fare hikes in the classes above the sleeper class, that is, the AC 2nd and 1st class. They oppose the increases in the lower classes as only that would affect the aam admi. This shows that everybody, even the hardcore communists, recognize the need to increase revenues within the railways. Before going into ways in which revenue can be increased, let’s look at why it needs to be increased.

1)      Operating ratio has to be decreased, currently 95 rupees are spent for every 100 rupees earned by the railways. The railways are owned by the government, ruining its financial health would not be in the best interests of the aam admi.

2)      SAFETY! – The Indian Railways transports a large sea of humanity. Around 30 million people travel by train every day!  Given this figure the number of accidents may seem like a relatively small percentage, however is being a part of small percentage any consolation to those who lose their lives? Small percentages translate to large numbers in India, making safety a major priority. The list of accidents can be seen here on wiki.  Safety costs money, Trivedi’s plan includes modernization of tracks, signaling systems and manning all level crossings.  The Aam admi values his life.

3)      Modernization-Hygiene- More Safety – How many of us who have travelled by our beloved Indian trains (even that really cool looking Shatabdi tween Chennai and Bangalore often preferred over flights) can call them hygienic ? The stench that accompanies  the railways is so characteristic that its considered ‘un-Indian’ to complain about it. Some of us have noticed recently with glee that the open-toilet systems are changing; many of the trains now have greener toilets (Lalu Prasad Yadav initiated this venture). Under Trivedi’s plan 2,500 more coaches would have green toilets by 2013. The open toilet system is dreadfully unhygienic, especially for those with homes near railway tracks. It also corrodes the tracks and costs the railways around 350 crores of rupees per year.

4)      Capacity! – Despite being such a large network serving countless number of people, there is always more demand for railway tickets. (We all have at some point woken up at 8am and  restlessly hit the refresh button on the tatkal bookings site of IRCTC with our fingers crossed hoping to get lucky).  Trivedi has set aside Rs 4410 crores to augment capacity.

5)      RnD (Design) – The Indian Railways don’t really look like the ones in Japan do they? The railways are a solid system and do their job well, it could do with a revamp in design though. Trivedi plans to put money into a dedicated Railway design wing at the National Institute of Design.

6)      Many more reasons can be found in the budget highlights.

To do all of the above Dinesh Trivedi has proposed borrowing from the market Rs 15,000 crores and also a nominal hike in the fares (after ten long years!).

The opposition thinks that fares should be increased only in the upper classes and not in the lower. I’d like to talk about why this is not such a great idea.

The Indian Railways is a price discriminating monopoly. Prices are different based on whether you are a student/senior citizen/physically handicapped/female senior citizen etc. Prices are different across different trains even for the same classes. The Indian railways also forces consumers to reveal their preferences by offering a range of products. All this is done with the differences in price elasticities in demand across the categories kept in mind. That is acknowledging the fact that increasing the prices have an impact on the quantity of ticket sales, and thereby on the revenue, but this impact is different across different categories.

While I do not have any data to substantiate my claims, I shall consider a case where there is a high increase in prices in the upper classes and none in the lower ones. I broadly guess that given the high fares in the AC 1st and 2nd classes and presence of low cost airlines as close substitutes, these classes would have relatively more elastic demand, that is an increase in prices would cut down travel by AC 1st class a lot, Making them a lot less competitive when compared to airlines which have a great advantage of saving on time. (Make my trip allowed me to book tickets from Delhi to Chennai by a low cost airline at Rs 4,700 as long as I booked really early, the corresponding Rajdhani ticket price on a 1st class was Rs 4,500). Some of the current AC travelers may also switch to the already overwhelmed second class sleepers given the large difference in prices, again bringing no new revenue and putting the ‘aam admi’ in further trouble with regard to lack of capacity.

For short distances buses might substitute the sleeper class trains, however as far as I have seen, the buses are more expensive than the trains and do not work very well for longer distances. Therefore the most inelastic segment of demand would be that for long distance travel by sleeper class, which is where the revenue killing has to be made. The price hike here is pretty nominal a Rs 5 per hundred kilometers is not going to put anybody off traveling.

We would all like safer more hygienic travel even if it meant shedding an extra hundred rupees. The hue and cry is over nothing. Kudos to Mr Trivedi for standing upright through this whole mess and refusing to roll back his changes despite being threatened with ouster. Those who oppose his changes should take a look at this.

 
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Posted by on March 15, 2012 in Economics, India, Politics, Society, Uncategorized

 

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Barack n Mo – Sharing their Woe.

The weekend is here folks. Enjoy with Barack n Mo.

 
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Posted by on November 5, 2011 in Humor, India, International, Politics

 

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Narendra Modi – India’s desperation and forgetfulness.

Narendra Modi is a man of many colors. One of them as we all know, is saffron. Moving on, Narendra Modi is also White and Green and an embodiment of the Ashoka Chakra. Narendra Modi personifies the Tiranga Jhanda. You guys think I am mad don’t you? So let me explain.

Modi has been saffron from a very early age. A member of the Rashrtiya Swayam Sevak’s Sangh since childhood and now also the Bharatiya Janata Party’s prime leader, a possible Prime Ministerial Candidate.

In January 2001 Gujarat shook. A 7.7 magnitude earthquake rattled the Kutch region claiming above twelve thousand lives and leaving Gujarat in shambles. Gujarat needed a leader, someone who would step in and take charge. Restore the livelihoods of the wounded and homeless masses. Gujarat needed Modi. In October 2001, Modi came to power and he did work, Modi did commendable work and was praised by many including the United Nations. Modi was a miracle. Or was he ?

In February 2002, Gujarat burned. Every report I read makes it very clear the religion followed by the owners of the burnt bodies. Fifty eight Hindus burnt in a train in Godhra. Seven hundred and ninety Muslims were killed in the violence thereafter etc. Was Modi complicit in giving the hindus a free run ? Was the saffron in him standing out ? These questions have been asked and will continue being asked over and over again. The courts gave Modi a clean chit and he came out smiling. I ask you, how does it matter? How does it matter who he sided with or whether he sided with anybody at all ? People died. Hindu/Muslim/Christian/Buddhist or Atheist is not the question here. People were killing each other and burning while law enforcement did little to nothing for a very long time. If you take religion out of the equation you realize Modi has no excuse left. He has to admit that he did not act effectively to stop the mass burning of his citizenry even when he doesn’t have to admit that he was pro-hindu. He has to admit his inefficiency if not his criminality.

Modi has since been turning white, peaceful, at least to the naked eye. He doesn’t want to be seen as a right wing extremist anymore. He wrote a letter to the public which reminds me of one of the apology letters I used to write in school. Mr Modi those are things that work when you go back to class ten minutes late after lunch time not when you are accused of not enforcing basic human rights in your state.(Also someone ask him what he means by ‘citizens of Gujarat’, it beats me). He is also saintly white because he doesn’t overturn the ghastly prohibition law on liquor. Ofcourse this only leads to illegal and shady liquor sales.

If you think the saffronization ended with the post Godhra riots, you need to read up about Sohrabuddin. It was a fake encounter staged by the police to brand an innocent man a terrorist and kill him. Yes he was also Muslim. The case centers around the involvement of Modi’s right hand man Amit Shah. Who is currently on bail. Now you must know that Modi, the true patriot that he is wants the Prevention of Terrorism Act (POTA) back. POTA which I find similar to USA’s Patriot Act, has a provision to detain a person for 180 days without filing of charges. More importantly, any confession made to the police during this time would be considered as evidence in the court, unlike under other acts. Look at it in this light, putting Modi in charge means getting back POTA and giving this man the power to lock anyone up for 180 days and forcing a confession out of him/her and sentencing him/her for it.

I agree we need strong anti terror inititiatives in India, the combination of Modi and POTA , is not what we need. The Indian people are faced with a bag of rotten choices, corruption or right wing extremism. A dynasty rule or a Hindu Rashtra, how do we choose ?
We must be very careful in making our choices, Hitler too came to power in Germany citing his developmental work and Germany’s need for strong patriotic leadership. Modi I agree is no Hitler. Isn’t Hitler/1000 or Hitler/10,000 bad enough though ?

Modi is also the embodiment of the Ashoka Chakra. Tireless work for development and his various ‘yojanas’ or plans which have aided in the rapid development of Gujarat. Critics point out that Gujarat with its vibrant diaspora was poised for development anyway. Nevertheless I give this man credit where its due.
He has also taken hues of green lately, with his latest book on climate change. Good show Modi. I am impressed. Even IPCC chief Dr Rk Pachauri who I greatly admire is impressed by the book.

That is why I nearly supported Modi myself. Until I realized I shouldn’t. I am borrowing a quote already used in this context by a fellow blogger here. Benjamin Franklin’s dictum that “Those who give up liberty to gain temporary safety, deserve neither liberty nor safety. “ You should read the article by Supriyo Chaudhuri its less verbose and really wonderful.

Modi, while embodying all the shades of our flag is really a test of our memory. Are we going to live up to the saying that public memory is short or are we going to move beyond that? Let us be worthy of our liberty.

Share it with friends, let someone come and beat me up for abusing Modi (seriously kidding) :P. Click below.

 
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Posted by on October 31, 2011 in India, National, Politics, Society

 

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Barack n Mo

Hey guys this is an initial attempt at cartooning, so if you like it, leave a comment/rating/share it around, so I’ll be back with more.

 
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Posted by on October 28, 2011 in Humor, India, National, Politics

 

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