Leave well alone

On Tuesday, in a move reminiscent of the Kingfisher-bailout debacle, the civil aviation ministry attempted to prop up a sputtering SpiceJet, whose total liabilities stand at Rs 2,000 crore and which reported a loss of Rs 310 crore in the quarter ending September, its fifth consecutive quarter in the red. The ministry suggested that banks extend it working-capital loans of Rs 600 crore, and oil companies as well as airport operators give it a 15-day credit line instead of insisting on cash up front. But SpiceJet rightly continues to be supplied with fuel on a cash-and-carry basis. Several banks, too, are reported to have ruled out additional loans. The “winds of creative destruction” are meant to pass through a market economy from time to time, sweeping away non-performers. The way to deal with this is certainly not to spread the toxicity to other firms by asking them to give the sick business an easy ride.

But the more important question is, rather than only looking towards banks, why are the promoters not being made to put in more equity or risk capital? Kalanithi Maran and family, promoters of the Sun group, which runs SpiceJet, evidently have the wherewithal to do this. In his prescient lecture at the Institute of Rural Management, Anand, last month, RBI Governor Raghuram Rajan criticised such “riskless capitalism” and the violation of the “sanctity of the debt contract” — promoters enjoy profits in good times, but when things go sour, they assert “their divine right to stay in control despite their unwillingness to put in new money”. Further, the banks, which don’t share in the upside, are compelled to give in and keep the firm alive in order to secure their investments. This highlights the urgent need not just for a comprehensive bankruptcy law but also to redesign the debt recovery process.

In the SpiceJet case, the government would do well to step back and let market-driven events unfold. It must not be seen to be promoting crony capitalism, or to be pro-business rather than pro-market.