From fuel taxation to fair competition, there are a number of preconditions that must be met if mass air travel is to be a reality.
Contrary to many assumptions, India is no longer a country of promise. The promise in India has arrived and is taking shape in an unprecedented way. Not long ago, India was a country governed by a strict Nehruvian model of socialism. While various sectors are still governed under Nehruvian nostalgia, the reforms of 1991 fundamentally transformed the institutional and governance structure of the state.
As the disposable income of the aspirational class grows and India integrates itself into the global economy, it will require significant investment in its infrastructure capacity. Investments in infrastructure will prove an important ingredient to steer economic development and equity. For many analysts, there exists a strong correlation between GDP and the aviation sector. They argue that, as the country grows, the ability to travel will penetrate across different classes and thus will create demand for global businesses. In the last few years (2009-2011), the total domestic airline passenger traffic of India, has seen a compound annual growth rate (CAGR) of over 17%, with 81 million passengers flying in 2015-16. If this trend continues, it is forecast that it will reach over 140 million passengers by 2020. Boeing estimates that air traffic within South Asia is alone expected to grow at 9.9% annually—marking it the highest growth rates in the world. If these estimates are to be taken seriously, South Asia will require around $120 billion investments and India covers almost 80% of this aviation market.
To meet these challenges, the Narendra Modi government, under the banner of ‘Make-in-India’, has promised greater focus on infrastructure development, by increasing liberalisation vis-à-vis its Open Sky Policy, modernisation of airports and logistical systems. In regards to permissions of FDI in commercial airlines, the Indian government has committed to allow up to 49% FDI in domestic scheduled passenger airlines under the automatic route (with intentions of increasing over 50%), and 100% permitted for NRIs. The recently passed 2016 National Civil Aviation Policy, also in principle confirms that the government is committed to improving its durable and immobile infrastructure capacity via expansion in airports, ground handling, entry of new airlines, PPP for developments and so on. This support from the government is also consistent with the emergence of low-cost carriers in India, such as Indigo, SpiceJet or Goair, besides the freight players such as Blue Dart, which has provided an impetus to grow.
The aviation sector, as many conclude, is in the ‘take-off’ stage, where it will soon achieve maturity and herald an age of mass air travel. But before this happens, there are a number of preconditions that are to be met and sustained. The civil aviation sector in this regards suffers from fundamental institutional, regulatory and policy framework problems.
Firstly, in terms of taxation on ATF (aviation turbine fuel) prices. Even though the oil prices globally have plummeted drastically in the last year, and airlines are benefiting from the global windfalls, ATF fuel prices in India are 60% higher in comparison to its neighbours. ATF prices in India is priced on average at $170 per kilolitre, compared to Sharjah at $101, Kuala Lumpur at $102, Singapore at $105 and Bangkok at $104.
This hefty difference in ATF prices are explained by three main reasons. One, the imposition of varied sales tax from 4% to 30% (by different state government in India), plus 8% excise duty and 3% education cess by the central government, amounts to 20% average tax imposition. Two, state-owned oil companies – Bharat Petroleum, Indian Oil, and Hindustan Petroleum – enjoy the exclusive right of supplying ATF to the domestic airlines and, therefore, the domestic airlines having no other choice but to buy it at the quoted prices. Furthermore, these SOEs receive heavy cross-subsidies on various petroleum products. Third, the volatility of the Indian rupee plays an important role. In 2013-14, despite a 3% year-to-year decline in crude oil prices, a weak rupee drove up aviation turbine fuel prices (ATF) by 6% (fuel costs constitute about 45 per cent of the total operating costs)
While both the present BJP government and previous Congress government (when in power) have pushed for greater tax reforms in India, the party in opposition has always opposed it. Even though the GST bill has now been passed by both the houses of Parliament, the political economy of tax reforms remains complex. The signal that investors expected from the current Modi administration has proved to be the precise opposite of ‘Make in India’. In 2014, the government levied an additional 12.36% service tax on aircraft lease charges to an already over-taxed sector. Such heavy taxation significantly undermines the demand and supply side economics and the result inflates the price and traffic setting practices.
In terms of law and policy challenges, the aviation sector suffers from clear entry and exit policies. For airlines like the Air India or the now infamous Kingfisher airlines, inefficient bankruptcy laws (with no single law), gives an advantage to not to repay loans or declare bankrupt. While the new ‘Insolvency and Bankruptcy Code, 2015’ was passed in the upper house last month, the impact of its passing is yet to be seen.
The entry of Air Asia and Tata’s venture with Singapore Airline, Vistara, became a cause of internal conflict between the old, new airlines and the DGCA (Directorate General of Civil Aviation) in 2015. A lobby group called ‘The Federation of Indian Airlines (FIA)’, owned by Jet Airways, Go Air, IndiGo and SpiceJet, took the matter to court when the government tried to grant Air Asia the permission to fly internationally sooner than the policy condition of 5/20 rule (i.e. an airline must fly on domestic routes for 5 years and must have a fleet of 20 aircraft, before flying internationally). The Tata Group, who holds stakes in both the new airlines (Air Asia and Vistara), lashed out against the old guards for asking protection, preferential treatment, and being afraid of competition.
While the lobbying continued, one for and another against the abolishment of 5/20 rule, the recently passed civil aviation policy is a poor compromise. It now mandates airlines to deploy 20 aircraft or 20% of their total capacity, whichever is higher for domestic operations, before they can commence international flights. This 0/20 rule, is in reality a 2/20 or 3/20 rule since no airline will adopt an aggressive business strategy. And, in regards to the recent airfare cap of Rs. 2500 per passenger per hour, the idea of forecasting the future and drafting appropriate contingencies creates the difficulty of arbitrariness and contractual incompleteness. Although fare opportunism can be built in contractual contingencies, the introduction of capping however distorts market norms.
And finally, in terms of regulation, the Directorate General of Civil Aviation (DGCA) has historically been known for hampering private sector growth. During the the Nehruvian era, DGCA was placed under the Ministry of Civil Aviation to perform regulatory functions and support state owned airlines, now known as Air India. In the 90s, it remained steadfast in its defense of national carriers and opposition to private players. It often exploited its vast regulatory powers to hamper private players. The notable example was the suspension of aircraft belonging to Damania Airlines.
In today’s market economy, the bygone framework under which the DGCA operates needs to be corrected. As it was highlighted in the 2004 Naresh Chandra Committee Report over a decade ago, it is imperative to have DGCA to be kept outside the purview of government in order to address the “inherent conflict of interest” as a protector and a promoter.
Withstanding the ‘Report of Working Group on Civil Aviation for formulation of Twelfth Five Year Plan, 2012-17’, which gives a staggering account of the human resource condition in the aviation sector, the above highlighted challenges in terms of taxation, regulatory and policy framework shows the need for dire reforms if the civil aviation sector is to mature. While the Modi government has launched many initiatives like the ‘Skill India’, ‘Make in India’ or ‘Digital India’, it would be premature to say these initiatives are delivering results at least in the aviation sector. It would also not be unreasonable to say that the aviation sector is experiencing much turbulence and it will be better for private actors to put their seat belt on before the flight takes off.
Gaurav Daga is student of Modern South Asian Studies at the University of Cambridge.