Exploiting the Growth Potential

One of the first steps that the Modi-led NDA Government took after coming to power in May last year was to initiate the process of revamping the policy on civil aviation in India. In the pursuit of this objective, in November 2014, the Minister for Civil Aviation P. Ashok Gajapathi Raju managed to put out in the public domain, a Draft Civil Aviation Policy and invited comments from all the stakeholders. The civil aviation industry in India that is largely dominated by the fortunes of the Indian airline industry, is generally seen both at the national and international levels, as having a huge potential for growth. This theme is oft repeated in seminars and other forums wherever and whenever the Indian civil aviation industry is on the anvil.

In December 2013, speaking at an event in Bengaluru related to renaming of Bengaluru International Airport (BIA) as Kempegowda International Airport (KIA), the then Secretary, Ministry of Civil Aviation, K.N. Shrivastava stated, “India is among the fastest growing and currently the ninth largest civil aviation market in the world. India is expected to become the third largest aviation market by in the world by 2020 after the United States and China. The country’s civil aviation market is expected to see a major upsurge in traffic in the next 10 years, with 337 million domestic and 84 million international passengers. At present, the Indian airline industry annually handles 117 million domestic and 43 million international passengers.”

Nearly two years later on October 7, 2015, speaking in Bengaluru at the curtain-raiser of the Fifth International Exhibition and Conference on Civil Aviation, India Aviation 2016, the Secretary, Ministry of Civil Aviation, R.N. Choubey reiterated, “We are embarking on an interesting journey with the new policy, which will catapult India to become the third largest market the world over.” Although the Civil Aviation Secretary did not say so, media reports on the same day on the briefing by him stated that the Indian civil aviation industry is the tenth largest as opposed to it being the ninth largest according to the statement by Secretary Shrivastava made nearly two years ago. The question that arises is whether the Indian civil aviation industry has slipped in global ranking by one position in the last two years or was it merely an error on the part of the reporter. Given the performance recorded by the Indian civil aviation industry in the last two years, the latter is more likely. This new ranking as mentioned by the reporter on October 7, 2015, has not been corroborated by any other agency.

The world looks upon India as the engine that will drive global economic growth in the future

Despite a host of impediments, the Indian civil aviation industry appears to be set on a reasonably high growth trajectory. However, the same can also be said about the airline industry in Asia, Africa and Latin America where it is being driven by a burgeoning middle class coupled with healthy economic growth. Thus if the Indian civil aviation industry is to ascend in global ratings to attain the third slot by 2020, not only the industry but the government too must get its act together and soon, failing which, the erroneous reporting on October 7 may turn out to be a reality.

If the Indian civil aviation industry is to grow, apart from a respectable rate of economic growth, the areas that need focus are infrastructure development, monetary policies of the government and reforms in the regulatory framework in place.

Prospects of Economic Growth

With the global economic crisis witnessed at the end of the last decade behind us, the nation has now entered a new era of economic growth generating high hopes of a bright future. In fact, the world looks upon India as the engine that will drive global economic growth in the future. Forecasts based on studies by specialised agencies had indicated that in the current decade, India could well have hoped to sustain a GDP growth rate at nine per cent up to the year 2020. However, there has been some disappointment in this regard. The actual rate of growth has slowed down and in the current financial year the rate of growth has been recorded as being around 7.2 per cent. In the next financial year, estimates are that the growth rate will go up to 8.2 per cent. The slowdown in the rate of economic growth is attributable to the chaotic political situation at the centre on account of which the government has not been able to pass some important bills that are critical to economic reforms thus stifling economic growth in the process. The Bills that are held up are related to land acquisition as well as goods and services tax. Today, just about three per cent of the population of India has access to air travel. However, if the steps taken by the NDA Government to accelerate economic growth do succeed, the benefits that will accrue will percolate to the lower economic strata of society and substantially expand the middle class with consequent beneficial impact on the Indian airline industry.

Infrastructure Development

There is no doubt that the Indian civil aviation industry has grown substantially since liberalisation in the early 1990s. The next wave of growth however, would come through regional airports. Today, aerial connectivity in the country is restricted largely to the six metros handling 65 per cent of the air traffic. The remaining air traffic is handled by airports at few Tier-I cities with sizeable population. Lack of aerial connectivity to the smaller cities has been an inhibiting factor in the growth of regional aviation. For the Indian civil aviation industry to grow rapidly, it would be necessary to enhance connectivity to the Tier-II and Tier-III cities and in due course, even to Tier-IV destinations.

Addressing the media on March 10, 2014, prior to the India Aviation 2014, a major civil aviation air show in Hyderabad, G. Ashok Kumar, Joint Secretary, Ministry of Civil Aviation, spoke of the long-term plans formulated by the UPA Government to build 200 low-cost, no-frills airports in the country in the next two decades. The aim of the exercise was to significantly enhance connectivity to and amongst Tier-II and Tier-III cities especially in remote and inaccessible areas particularly of the North East. In fact the theme of India Aviation 2014 was ‘Enhancing Air Connectivity’ which he said, was expected to spur growth in the Indian civil aviation industry. For such an exercise to be successful, state governments would have to play a major role especially with regard to acquisition of land for new airports or expansion of existing ones. This often proves to be difficult as it gets bogged down in the quagmire of political dichotomy between the Centre and the state.

However, with the change in the government at the Centre in May 2014, the matter receded into the background. Despite its declared intentions to provide fresh impetus to the Indian civil aviation industry, the NDA Government put the ambitious plans of the UPA Government to build a large number of airports in Tier-II and Tier-III cities on hold as these smaller airports were not commercially viable owing to low demand and high maintenance and operating costs. Of the 50 locations for developing low-cost airports identified by the UPA Government for Phase I, work continues only at five locations. These are in the states of Karnataka, Rajasthan, Arunachal Pradesh and Odisha.

With only a miniscule percentage of the population in India availing of air travel, the potential for growth in the Indian airline industry is indeed humongous

At the end of May this year, in a review meeting of the infrastructure ministries, Prime Minister Modi directed the Ministry of Civil Aviation to focus on improving air connectivity to smaller cities and promoting regional carriers. The Ministry of Civil Aviation thus is once again planning to revive plans to develop low-cost airports in non-metro cities. The government is also contemplating major changes in the financial paradigms of developing and operating regional airports. This will be part of the new civil aviation policy as and when it is implemented.

Monetary Policy Issues

Perhaps the most important issue under this head that the government must address is the high cost of aviation turbine fuel (ATF) which accounts for up to 45 per cent of the operating cost of an airline. Today, the price of ATF in India is the highest in the world on account of which Indian carriers are not in a position to compete with foreign carriers operating in or through India. There is therefore a crying need to reduce taxes on ATF levied by both the Centre and the states to make it on par with the prices prevailing in the region such as in Dubai and Singapore. The government must respond to the longstanding demand of airline operators to place aviation fuel under the declared goods category, a step that will bring some relief to the Indian carriers. Similarly, there is a need to review airport landing and parking charges as well as taxes levied on maintenance, repair and overhaul (MRO) activities which are somewhat exorbitant and irrational.

Regulatory Affairs

The Indian civil aviation industry has the dubious distinction of being perhaps the most highly regulated sector. The government needs to simplify licensing procedures, adopt a more effective ‘Open Sky’ policy and revise international flying norms for domestic carriers which will involve abrogating the so called ‘5/20’ rule that adversely affects newly established domestic carriers vis-à-vis foreign carriers operating to and from India. As per information available at this point in time, there is a proposal to replace the 5/20 rule by a new procedure that might prove to be more complex as well as detrimental to the interest of Indian domestic carriers. Hopefully, these issues would be addressed correctly in the new civil aviation policy.

The Road Ahead

With only a miniscule percentage of the population of 1.3 billion in India currently availing of air travel, the potential for growth in the Indian airline industry is indeed humongous. However, air travel has to be made less expensive through lower taxes and other charges so as to make it affordable by larger segment of the society. Development of capacity through growth in infrastructure, enhanced focus on regional aviation, forward looking monetary policies and an enlightened regulatory regime are the essential prerequisites for the Indian airline industry to prosper. What is needed is a positive mindset on the part of both the stakeholders in the Indian airline industry and the policy makers. With proper collaboration between the two, there is good chance that the Indian civil aviation industry could climb to the third slot in global ranking by 2020 and even to the top slot by 2030.