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Indian Institute of Management Bangalore
PGPPM (2013-15), TERM-I
State, Market, and Globalization
FINAL EXAM
INSTRUCTIONS
1. This is an open-everything exam. You are free to consult any electronic or paper
resource. However, you may not communicate with your classmates during the course
of the exam. You are required to sign the honour statement at the end of this
instruction sheet.
2. Please use only the space provided on the exam to craft your answers.
3. The exam contains three questions. The first and the third questions are worth 35 points
each; and the second question is worth 30 points.
4. The exam is designed to written in 150 minutes. However, please feel free to use the
entire four-hour duration to craft your responses by critically drawing upon your course
material.
5. There are fourteen pages on this exam (including this cover sheet). Please contact the
proctor if your copy has pages missing.

Honour Statement:
Please read the honour statement carefully and affix your signature below the statement, in the
space provided.
I pledge my honour that I have neither received nor provided help on this exam. To the best
of my knowledge, the work on this exam is fully compliant with IIMBs academic integrity
policy.
NAME: ____________________________________________________________
PGPPPM Roll NO: ____________________________________________________

SIGNATURE _________________________________________________________

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QUESTION-1 You are hired by the Ministry of Finance, Government of India as a policy
consultant to help the Union Government forge its position on the ongoing growth versus
distribution debate that was partly ignited by exchanges between two distinguished economists
Prof. Jagdish Bhagwati and Prof. Amartya Sen. The ministry of finance has been charged by
the Prime Minister to develop an official position on the growth versus development debate
given its centrality in the upcoming general elections. Using readings from the course, develop
this policy position in the form of a policy memo addressed to the Union Finance Minister. The
Finance Minister is well versed in the language of political economy and will appreciate a critical
memo that is grounded in both scholarship and praxis. Thus your memo must reflect on
fundamental normative presuppositions of various social contract theories or the fundamentals
of how state , market, and society intersect without losing track of extant social, political, and
economic realities.

















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QUESTION-2 Write a critical essay that identifies theoretical potential problems with the
arguments contained in Atul Kohlis two part essay, Politics of Economic Growth in India 1980-
2005. If you do not have any reason to disagree with Kohli, write an essay that carefully
considers alternate theories and clearly argue whey Kohlis state-market intersection
framework better explains Indias observed growth patterns (relative to competing theories).






















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QUESTION-3 Please read the following excerpts from a recent article in Tehelka and answer the
questions that follow:

Three men and a mascot. They mark the glorious period of Indian aviation. They are also
the very symbols of its downfall. The last decade saw the rise of privately-owned
worldclass Indian carriers, only to see them going down. What we have now is one more
sunrise sector on the verge of going bust.
What went so terribly wrong? Are adverse economic headwinds, high debts and faulty
business models to be blamed for this decline, or is there more to it? Have policies been
twisted to suit corporate interests? Has the government regulatory framework given into
corporate demands? The answers perhaps lie in the way these stories tell themselves.
First, the three men.
Man 1. Considered the pioneer of modern civil aviation in India, Jet Airways Chairman
Naresh Goyals story is awe-inspiring. Starting as an accountant in his uncles travel
agency, Goyal rose to become the owner of what is today the biggest fleet of privately-
owned aircraft in the country.
Jet Airways arrived in 1991 when the government announced its open skies policy,
paving the way for private players into the aviation sector and, therefore, more
competition. The then aviation minister Madhavrao Scindia too urged private airlines to
expand their fleet during the strike called by Indian Airlines to oppose the governments
policy.
Many companies threw their hat in the ring. Headlines plastered across newspapers
announced this exciting new development with photographs of shiny planes,
airhostesses in short skirts and whiskey with breakfast on sunrise flights. But the bubble
burst soon.
Pervez Damania, a rich poultry farmer from Mumbai, got a licence for an air taxi
between Mumbai, Delhi, Goa and other cities. Within a year, Damania Airways had
overspent and was finding it hard to get funds. The airline was eventually sold to NEPC
India Ltd and died a natural death.
In another case, East-West Airlines, which received its air taxi licence along with
Damania Airways, failed to meet payments. In 1995, Managing Director Thakiyudeen
Abdul Wahid was shot dead by members of the dreaded Chhota Rajan gang. Unable to
pay back the cost of the Boeings it had hurriedly acquired, East- West too had to shut
shop in 1996.
Now, consider Jets arrival against this background and you cant help but feel
admiration for Goyal. But did Jet Airways owe its survival and subsequent success
to other factors too? According to an aviation expert who sits on the boards of several
prestigious firms, Jet wanted policy to suit them. The routes, the capacity, the policy, all

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regulatory allowances from the Directorate General of Civil Aviation (DGCA) only
favoured them.
In an interview to CNN in 2005, talking on the need for lobbying, Goyal had admitted to
the importance of being in close proximity with decision-makers. I think in the US,
people know how to deal with senators in Washington, he said, people in Boeing
know, IBM knows, everybody knows. In England, people know. So it is nothing shrewd.
You have to understand your system.
Goyal understood the system well. You had to be stupid not to succeed when you
controlled the market and the scarce resources, says Captain Gopinath, founder, Air
Deccan. He points out that in India, to survive and do well in a regulated environment
one needed a few attributes, especially in the licence raj, including the ability to work
with, and often manipulate, the government and be quick in accessing capital.
Now, with the controversy raging around the Jet-Etihad deal, questions are being raised
around this very ability of Goyal. The Rs 2,000 crore deal, where Jet sold 24 percent stake
to the UAE-based Etihad Airways, has become the latest flashpoint in the troubled
aviation sector. The deal gave Etihad a majority stake in Jet Airways frequent flyer
programme, Jet Privilege, and Rs 378 crore towards three pairs of slots at Londons
Heathrow Airport through a sale and lease-back agreement.
Jet also received a $300 million five-year loan at a very low interest rate. But what raised
eyebrows was the bilateral decision that was taken to raise the weekly air seat capacity
between India and UAE to almost four times from about 13,000 to 37,000. The
government liberalised the weekly seat quota to facilitate this deal, signalling to the
aviation sector that India-Abu Dhabi promises to be one of the busiest air routes.
And therein lies the rub. Although other airlines could tap into the sector, it will not be as
lucrative for them as Etihad, which has Abu Dhabi as its hub and will be able to offer
lower fares, effectively eliminating all competition.
From a policy standpoint too, the deal came under scrutiny after the Prime Ministers
Office (PMO) was dragged into it over the timing of the bilateral agreement, and
importantly, for being skewed in the UAEs favour. Goyal had met civil aviation ministry
officials, including the aviation secretary in March in this connection. This deal is a
manifestation of all that has been wrong with the aviation sector in India, says Jitendra
Bhargava, former spokesperson of Air India.
That aviation big-timers have always had the ear of the power corridors is not new. But
much more has gone wrong with the industry. High costs of operations, expensive
parking and landing rights, high prices of air turbine fuel, almost no quality maintenance
facilities (so much so that Indian carriers had to send their planes to Dubai for servicing)
and high taxes have all led the sector to the mess it is in today.
BJP leader and former aviation minister Rajiv Pratap Rudy sums up the current scenario.
Indian policymaking has always been more focussed on individual airlines than the

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sector, he says. Vijay Mallyas aviation model was faulty from the start, Sahara did not
have the correct approach and made (Naresh) Goyal almost pay a ransom of Rs 2,000
crore when he bought the airline.
Even as other players like Indigo, GoAir and SpiceJet seem to be benefiting from
relatively leaner operating models no-frills flying without free meals or blankets
they too admit the sector needs an overhaul for them to service customers competitively
for a long term. The reason Indians can now carry only 15 kilos baggage and no more
has a lot to do with the high operating costs mounting on their balance sheets.
How did things come to such a head and when? A large part of the blame would go to
retrograde policies and extra costs. A banker familiar with the aviation sector says that
most airlines in India have often forgotten who makes up their market. Its those
migrating from buses and trains. Indigo, SpiceJet and other budget carriers have come
and proved this to Jet and Kingfisher, who became victims of sexy marketing.
Man 2. Vijay Mallyas Kingfisher has no one else to blame but itself for its failure. The
idea was novel, but the execution was nothing more than a vanity exercise gone horribly
wrong.
Within two years of the airlines operations, no one knew what Kingfisher stood for. The
airline went from high-end economy class travel to an unsustainable luxury business
class airline.
Mallyas desire to take the airline overseas has also come in for sharp criticism. He
wanted Kingfisher to go neck-and-neck with Jet Airways, which had already launched its
global operations. Since Indian aviation rules need an airline to complete five years of
domestic operations before it can take flight internationally, Mallya decided to take the
short cut in 2007 by buying out Air Deccan, which had completed its five years of
operations. The deal proved to be a dream for Deccan and a deadweight for Kingfisher,
which spent Rs 550 crore for a 26 percent stake, valuing the budget airline at Rs 2,200
crore.
Ego over business is what the Jet versus Kingfisher script had become. Goyal bought
Sahara Airlines so Mallya couldnt, and Mallya rushed to buy Deccan so he could beat Jet
by flying overseas in style. As a banker explains, this ego rush shouldnt have come to
entrepreneurs with prudent business sense. To a certain extent, they could take
financial risks because they had political might, he says. A bit like too big too fail?
Man 3. Subroto Roy
The Mascot. If Jet, Kingfisher and Sahara are stories of hubris, inflated egos and
greed, Air India is a textbook story of government mismanagement. As the owner ofAir
India, the government has rarely done the right thing to keep it viable, says Cyrus
Guzder, an aviation expert with the Indian arm of Air Asia. Over time, the national
carrier has been allowed to go weak, when private carriers have been allowed to grow.

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During the UPA-1 government, under the then aviation minister Praful Patel, Air India
placed an order for 111 aircraft from Boeing. This expansion was in excess of the airlines
own fleet plans and cost over $8.7 billion when it was showing sales of around $3 billion.
The CAG expressed concern at the ministrys decision to brush aside the objections raised
about its assumption that higher capacity would automatically result in higher market
share. This deal came under severe media and parliamentary scrutiny and would haunt
Patel for a long time.
The CAG was also critical of the bilateral agreements the aviation ministry signed in the
years following 2004, giving big advances to international carriers as Air Indias fleet
expansion happened over time. By the time Air India got its planes, the market share
was already taken up by other airlines.
Since then, despite bailouts, the government has protected the national carrier without
really letting it take full flight. At a time when Air India had the opportunity to fly
overseas and capture market share on international routes, private carriers were let in.
Later, the government experimented with Air India Express, which was a disaster from
the start because it entailed buying yet more planes for an airline already overleveraged
on purchases.
Enough has already been said about the doomed Indian Airlines-Air India merger, which
was done on the pretext of increasing efficiency. Praful Patel announced there would be
no redundancies. What good did it do to merge two white elephants and not cut excess
capacity remains an enigma even today.
In an inversely proportionate kind of way then, Air India was central to the growth of
private airlines. Failure of the national carrier fanned new private players.
I dont think the private sector works in a vacuum, says former commerce secretary
Ajay Dua. Conditions were created to an extent when government carrier Air India
became so inefficient that private carriers began to thrive.
According to Kapil Kaul, CEO, CAPA South Asia, there are three problems created by the
government: A negative cost regime, lack of a civil aviation policy with a poor
regulatory framework and low competence levels, and no long-term planning for
developing infrastructure, including human resources.
The government has much to explain, says Air Asias Guzder. They have refused to
announce an aviation policy or guidelines for the industry. This means entrepreneurs
eager to enter the sector must also be open to the risk that the policy may change
anytime. How can people be asked to invest billions of dollars in planes without a policy
in place?
Tony Fernandes, founder of Air Asia has been quoted recently as saying vested interests
and negativity from within the airline industry have been responsible for lopsided rules.
Billionaire to Millionaire. Virgin Atlantic Founder and Chairman Richard Branson had
famously commented that if you want to turn from a billionaire to a millionaire, start

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an airline. In many ways, his words have come true in the Indian context. While some
players have seen the wisdom in this statement and made the most of their
opportunities, India is also on the fast road to millionaire from billionaire. According to
aviation research body CAPA (Centre for Asia Pacific Aviation), in the past six years,
Indian carriers have already lost over $10 billion.
Seen against this backdrop, the decision to not increase FDI in this sector from 49 to the
expected 74 percent does not come as a major surprise. According to Dhiraj Mathur,
aviation expert at PricewaterhouseCoopers (PWC), we were already three years too late
on it. We didnt just need it for the money but also for talent and expertise, explains
Mathur. Today the sector is starved of people who understand how to run aviation
operations.
Ironically, Naresh Goyal was among the first ones to oppose FDI in aviation, and yet
now, he is the one who would have benefited the most from it. It is puzzles like these
that need to be solved before we get down to fixing the board for a fresh round again.
Until that happens, Indian aviation will continue to fly low.
shaili@tehelka.com
(Published in Tehelka Magazine, Volume 10 Issue 30, Dated 27 July 2013)
QUESTIONS
1. Market failures provide one rationale for government regulation. Describe two specific
market failures and how the government can remedy them.


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2. This article implies that lobbying exists in India and affects how regulations are framed and
implemented. What may be the differences between how lobbying works in India and how it
works in the United States? Are their impacts different? Should India go the American way?
Why?









3. Why doesnt the government shut down Air India? Respond by building on the theories we
discussed in class, especially the Interest Group lecture.











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4. Illustrate, using examples from the article above, how lobbying and rent-seeking behavior
have caused inefficiencies in the Indian aviation market.









5. Indias print media has been protected from foreign competition for some time but that
might change now, as India seeks more Foreign Direct Investment. What are the arguments for
keeping foreign competition out of Indian print media? Do they hold in this era of the Internet
and when broadcast media has no similar restrictions?












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