One of the characteristics of the Nehruvian economy was to bail out the loss-making companies, even if they are in the private sector. In order to save the job of the employees, the government used to bail out loss-making companies, and there was no strong law for dissolving the company- even if it is on the verge of loss. Since the implementation of Insolvency and Bankruptcy Code 2016, we have at least a law for the resolution of loss-making companies.
The old corporate houses, which were used to government bailouts if the company posts loss, are still operating with the same mindset. Aditya Birla Group, led by scion Kumar Mangalam Birla, is a prime example of a company which is still functioning with Nehruvian mindset.
A few days ago, speaking at the HT leadership summit, Kumar Mangalam Birla said that Vodafone Idea Limited will have to shut shop, if the government does not announce a bailout package. “If we are not getting anything, then I think it is the end of story for Vodafone Idea,” said Birla.
This was a sort of threat to the government, by the chairman of Vodafone Idea, whose industrial house has been habitual to government bailouts. As argued by Chief economic advisor- Krishnamurthy Subramanian, government bailouts are moral hazards because, public money is thrown to compensate for private losses, and incompetent industrial houses, sustain on taxpayer’s money.
Birla said that the government wants three private players and one government player in the telecom industry, and therefore it will help Vodafone Idea. “They have publicly stated that they want three players from the private sector and one player from the public sector, so I think we can expect much more stimulus from the government” said Birla.
Faced with tough competition from Jio and Airtel, the shares of Vodafone Idea have sunk to rock bottom. The company posted a net loss of 50,922 crore rupees in the last quarter, one of the highest posted by any Indian company in a single quarter.
The subscriber base of the company declined by 9 million users in the September quarter, and average revenue per user (ARPU) slipped from 108 to 107. The analysts do not have any confidence in the sustainability of Vodafone Idea; most of them predicted duopoly (Airtel and Jio) in the telecom sector. If the government puts good money to cover the losses of the Vodafone, it will be a moral hazard.
The entry of Mukesh Ambani-led Jio forced many small players out of business and the merger of Vodafone and Idea, two of the largest independent telecom operators. Despite the merger, the combined entity has lost more than 5 crore subscribers; and is the second-largest telecom operator with 31.1 crore subscribers. Reliance Jio, which entered in the telecom market almost 3 years ago, has become the largest player with more than 38 crore players.
Birla, who owns 11 per cent shares of the combined entity, suffered a loss of 3 billion dollars in personal wealth, due to free fall of Vodafone Idea share prices. The net worth of Birla has now shrunk to about $6 billion from $9.1 billion two years ago, according to the Bloomberg Billionaires Index. And this loss is directly being attributed to the merger with a sinking Vodafone.
If the government gives in to the pressure tactics of Aditya Birla and offers bailout package to the sinking telecom operator, it will be a moral hazard, as well as loss to honest taxpayers. The Birla group is among the oldest business houses of the country, and it is used to Nehruvian era government bailouts.
Modi government tried to build a new economy based on ‘rule of law’. A rule-based capitalist economy, where profit-making will be rewarded, and loss-making companies will be forced out of the market through Insolvency and Bankruptcy Code. Last time, the employees of Jet Airways tried to build similar kind of pressure on the government- for the bailout package to the loss-making entity, but, the Modi government had not offered a single penny to the group. In the case of Vodafone Idea too, the government should not interfere with the market forces and the company should exist, if it is not able to compete.
