The ideological abyss: Vodafone rescue requires solutions, not ideology

To rescue or not to rescue Vodafone goes beyond one's views on privatisation or nationalisation - it depends on what will work in a given context

This column is called “Beyond Ideology” for a reason. When polities, economies and societies have become more and more complex and diverse in nature, using ideological lenses to make policy has limited utility. Today, no country can be called capitalist or communist as these terms were originally defined. They are all hybrids. When technology companies wield so much power and know so much about us, should we just call them private companies providing a service or private-public entities with state-like characteristics? Normally, it is the job of the state to regulate economic and social activities; but we expect social media to do some of the regulatory jobs that states usually do.

 

In this article, one does not propose to examine all these issues, but to focus specifically on one question: When is it okay to privatise an entity, and when does the opposite serve public interest better? We shall do it using two examples: Vodafone and Air India. Both were (and probably still are) basket cases, needing sector- and case-specific solutions that go beyond ideology. We have to focus on what works.

 

The Narendra Modi government appears to have tied itself in knots over Vodafone Idea. The company is sinking, but the government is unsure how to handle its request for a bailout. Telecom Minister Jyotiraditya Scindia said in an interview with CNBC TV-18 that he cannot offer the company’s massive dues for conversion into equity. Since the government already holds a 49 per cent stake, converting more dues would make Vodafone a public sector unit.

 

On the other hand, Airtel — despite being more solvent — has muddied the waters by seeking a similar conversion of a part of its dues into equity. This makes any Vodafone-specific bailout harder to justify. Banks, meanwhile, are balking at the idea of lending more to Vodafone, especially when Mahanagar Telephone Nigam Ltd (MTNL) has technically gone into default. MTNL is a quasi-sovereign borrower, which owes more than ₹8,000 crore to lenders, and some banks have marked the loans as non-performing.

 

The government has a few options on Vodafone. One is to allow it to go bust and let the banks pick up the pieces in bankruptcy court — leaving behind a duopoly of Airtel and Jio, with the still-struggling Bharat Sanchar Nigam Ltd (BSNL) bringing up the rear. Another is to nationalise it, write off its dues (as a state-owned unit, the government can do so by recapitalising Vodafone and then paying off the spectrum and AGR or adjusted gross revenue dues to itself). It can offer the company back for privatisation later. This will also avoid having to give Airtel the same conversion option as state units can be treated differently when it comes to equity infusions. Third, the government can ask Airtel and Jio to buy up portions of Vodafone’s circles as running units (minus most of the debt, as was done for Air India), so that customers are not left in the lurch.

 

The government is not thinking clearly on the issue. Just wanting more competition by letting Vodafone stumble on is not an option, especially in a capital-intensive industry where oligopolies are often the norm. Whether you believe that the government has no business being in business, or otherwise, you cannot decide solely on the basis of ideology.

 

In the case of Air India, the government decided (correctly) that it could not really run an airline and coaxed the Tatas to take it off its hands. That, three years later, the Tatas are still struggling to put the airline on an even keel (with the recent crash making things more difficult) tells us why even privatisation is not a panacea. Agile decision-making is the need of the hour not only in government, but also in the private sector.

 

The Tatas probably got back into aviation because Ratan Tata loved the business; but now that he isn’t around to provide the passion to keep Air India flying, the Tatas also need to rethink how they must run Air India. Maybe a scaled-down, high-quality Air India is better than a scaled-up one with unlimited potential for losses.

 

The government also needs clarity on what exactly it wants to do with the public sector in general, beyond strategic areas like defence or banking. Before the Air India privatisation, the government seemed keen on strategic sales of some companies (Bharat Petroleum, Shipping Corporation, Concor, and IDBI Bank), but the agenda seems to have meandered off into a decision-making abyss. There is talk of IDBI Bank being on the selloff list this financial year, but one cannot bet on this.

 

As for the banks left out of the merger process of 2019, we don’t know if some will indeed be privatised or end up being merged with stronger banks when their balance sheets weaken — as they could at some point. The fact that public sector balance sheets are healthy right now seems to give the government comfort about retaining them indefinitely as taxpayer assets.

 

Two years after Mr Modi took over as Prime Minister, the Department of Disinvestment was renamed the Department of Investment and Public Asset Management (Dipam). The focus shifted from rescuing banks and preventing their misuse by meddlesome ministers and bureaucrats to extracting value from public investments through dividend payouts and asset monetisation.

 

But Vodafone will bring the issue to a head once more. With ₹2.3 trillion in debt, much of it owed to public sector banks, a default or liquidation would dent bank balance sheets. With one public sector unit (BSNL) nowhere near profitability, another in default, and a half-private sector unit (Vodafone) about to go belly up, where exactly does this leave the government’s telecom policy? Why balk at nationalising Vodafone when you are already halfway there, and the company is sending SOS after SOS to the government and banks to save it from liquidation?

 

Governance alone cannot rescue public (or private) sector companies when the winds of competition go against them. One need not take a doctrinaire approach to nationalisation or privatisation, for either may work in different circumstances. There is a presumption that a government that does not meddle with the operations of a company has every right to keep running those companies. However, this would be short-sighted.

 

 Sooner or later, the Modi government has to make up its mind on leaving behind a legacy of good governance in the public sector, and this means letting at least some of them be privatised, and insulating the rest from government meddling. There is no halfway house, and good governance cannot be the result of one administration’s good intentions alone.

 

One does not have to be ideologically committed to privatisation (or the opposite, to strengthening the public sector), as long as the decision stems from a well-articulated game plan that is suited to a specific context. Right now, we can’t be sure what that game plan is.

           

  The author is a senior journalist