Free Essay

Socio Economic Political Connections

In: Business and Management

Submitted By shreeneve
Words 1191
Pages 5
Political Ties and its Effect on National Airlines of India
By Shree Neve.

1. Introduction

A company is politically connected with a politician if one of the company’s large shareholder or its top officer is: (a) a member of parliament (MP), (b) a minister or the head of state, or (c) closely related to a top official (Faccio, 2006). A company can have a politically connected individual in various scenarios: (a) either at a top most position of the company, (b) either as a large stakeholder, or (c) national ministry in-charge of a national company. The state owned enterprises (SOE’s) have direct political connections as they are completely governed and controlled by the ruling state party. SOE’s are an integral part of the nation’s economy, its welfare and social responsibility. SOE’s can raise the nation’s economy to humongous levels if managed efficiently by the responsible politicians and individuals handling the SOE. However, using SOE’s for individual benefits and not for national economy can have adverse effects on the SOE leading to huge losses of nation’s economy. Consequently, in some cases a politically connected firm can use its political ties for increase a firm’s performance and overall productivity but in some scenarios a politically connected firm can support a politician connected to gain personal benefits.

2. Downfall of the great Red Indian Maharaja, Air India

A typical case of India’s national airline carrier Air India during the regime of Mr. Praful Patel from 2004 to 2011 (Referred from India.gov.in) showcases the downfall of Air India’s performance and productivity due to illegitimate management by its politically connected authorities. In 2004, Air India’s profit and loss statement stated PBT (Profit before Tax) of 24.7 million USD that reduced to 17 million USD in 2005. Further, Air India’s annual Profit and Loss Statement of 2006 reports PBT of only 2.16 million USD, showcasing an overall annual decrease of around 15 million USD. The current losses of Air India mount up to around 130 million USD (Air India 2005) (Air India 2006) (Air India 2004). A series of incidences from 2004 to 2011 are primarily responsible for the collapse of India’s national airline carrier.

On August 2, 2004, within months of becoming the aviation minister Mr. Praful Patel decided to inflate Air India’s purchase order from the original purchase of 28 aircrafts to 68 aircrafts (Referred from IndiaToday, 2011). This purchase order was made at a stupendous cost of 930 million USD. The order was never backed up by a feasible revenue plan that stated the increase in profits of Air India. Even after a strong opposition from Mr. V. Subramaniam (the then secretary financial advisor of Air India), Mr. Praful Patel still went ahead with the revisited plan to order more number of aircrafts. Even though there was a hierarchy to be followed, Mr. Praful Patel used his political ties and went ahead with the opposed plan keeping the hierarchical concerns in complete blindness. At that point Air India had an option of arranging the payments with a minimal interest rate of 4% from Airbus but rather, Air India took loans from IDBI (The Industrial Development Bank of India) at high interest rates of 11.75%. As a result, incurring further losses of 5 million USD for the already debt depended Air India firm by the end of March 2010 (Referred from Firstpost, 2011). It was extremely amusing to see that a firm with turn over of just 130 million USD placed an order of 930 million USD.

The objectionable order had already subjected Air India to huge losses, but Mr. Praful Patel insisted on increasing the number of flights from India to San Francisco. This route impacted Air India’s revenue, as it was not a profitable route and Air India’s competitor Jet Airways had already called off flights from that particular sector. Thus the irrational decision of continuing with the loss-making sector had future effects on the growth of Air India. Further analysis reveal of another scenario where Mr. Praful Patel was involved in a bribery pertaining to new facial recognition software for Air India developed by a Canadian company, Cryptometric. Allegations have been made that the bribery amount was paid using Air India’s funds and was repossessed by individuals linked to Praful Patel (Referred from NDTV, 2012). During the reign of Mr. Praful Patel, Air India merged with Indian Airlines; the decision of mergers of these two companies was reflected with an increase loss in Air India’s profits. Apart from merger, in 2009 Praful Patel granted Dubai carriers the right to operate flights with 54,200 seats a week to 14 cities corresponding the earlier grants of 10,400 seats a week to 6 cities. This decision lowered the number of passengers travelling per week by Air India, consequently impacting the airlines profits (Referred from Livemint, 2011).

3. Conclusion

The illicit management of Praful Patel was one of the key reasons for the downfall of Air India. Thus, it can be observed that SOE’s that are not managed by efficient personnel can result in a turmoil effect for the firm and lead to its demise. If the political connections are used considering favorable outcomes for the company’s performance and growth it can help a company to increase its profit. But on account of several similar cases around the world as that of Air India, SOE’s are victims of unethical political connections restricting their future growth.

References

1. Air India 2005. (n.d.). Profit and Loss Air India 2005. Retrieved October 28, 2012, from Air India: http://www.airindia.com/SBCMS/downloads/05_Profit_and_Loss_Account_for_the_year_ended_31_March_2005.pdf

2. Air India 2006. (n.d.). Air India Profit and Loss Statement. Retrieved October 28, 2012, from Air India: http://www.airindia.com/SBCMS/downloads/06_Profit_&_losss_accounts_for_31_march_06.pdf

3. Air India 2004. (n.d.). Air India Profit and Loss Statement. Retrieved September 28, 2012, from Air India: http://www.airindia.com/SBCMS/downloads/04_Profit_and_Loss_Account_for_the_Year_Ended_31_march_2004.pdf

4. Referred from IndiaToday. (2011, May 8). IndiaToday. Retrieved October 28, 2012, from Ex-minister Praful Patel forced Air India: http://indiatoday.intoday.in/story/praful-patel-plummeted-air-india-into-financial-mess/1/137466.html

5. Referred from Firstpost. (2011, August 7). CAG points finger at Air India. Retrieved October 28, 2012, from Firstpost.com: http://www.firstpost.com/business/cag-points-finger-at-ai-for-huge-losses-under-praful-patels-leadership-55697.html

6. Referred from NDTV. (2012, February 03). Praful Patel faces bribery. Retrieved October 28, 2012, from NDTV.com: http://www.ndtv.com/article/india/praful-patel-faces-bribery-allegations-denies-wrongdoing-172936

7. Faccio, M. (2006). The American Economic Review. Politically Connected Firm , 96-1, 369 - 386.

8. Referred from Livemint. (2011, September 09). Praful Patel blamed for grounding Air India. Retrieved October 28, 2012, from Livemint: http://www.livemint.com/Home-Page/nIH6rsgfrpMlgJSy5CqJ5O/Praful-Patel-blamed-for-grounding-Air-India.html

9. Referred from India.gov.in. (n.d.). Detailed Profile - Shri Praful Manorbhai Patel. Retrieved October 28, 2012, from india.gov.in: http://india.gov.in/govt/loksabhampbiodata.php?mpcode=3557

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[ 1 ]. Rate of conversion : 1 INR = 0.018USD , as on 28/10/2012.

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