While the new aviation policy has framed the sectoral priorities right, how it is implemented will be critical
A lot has clearly been happening in the civil aviation sector over the last month. It began when the Union government unveiled the first integrated National Civil Aviation Policy (NCAP) 2016 after extensive consultations with stakeholders, seeking to turn India into the world’s third largest aviation market by 2022. And more recently, the government sought to liberalise the investment regime by allowing 100% FDI in scheduled airlines under the government-approved route.
But first the NCAP. While the new aviation policy is a comprehensive one and covers a host of sub-sectors, it is its thrust on regional connectivity that is its defining feature, seeking to put on the aviation map India’s smaller cities and towns, hitherto uneconomical for commercial airlines to fly—significantly, the abolition of the 5/20 rule which has hogged headlines is unlikely to impact the sector in the next few years. While the policy had outlined the contours of the Regional Connectivity Scheme (RCS), it was only last week that the Ministry of Civil Aviation (MoCA) put in the public domain a draft RCS that fleshes out the details.
Integral to the scheme is the development of the 450-odd airports/airstrips in the country and construction of new airports. Of the 125 airports belonging to the Airports Authority of India (AAI), about 95 are operational at present, of which 71 have scheduled commercial operations. The civil aviation ministry plans to develop “no-frills” airports with the assistance of state governments, at an indicative cost of R50-100 crore each—finance minister Arun Jaitley announced at a recent press conference that 25 regional airports would be developed by the end of this year.
The government has a two-pronged strategy for implementing the RCS. First, in order to stimulate demand on untapped routes, it has proposed capping fares at R2,500 for a one-hour journey of 500 km. Second, to make the scheme lucrative for airlines, the government plans to provide them concessions, as well as Viability Gap Funding (VGF).
Payment of VGF to airlines will be made from the regional connectivity fund, with the state availing the scheme reimbursing 20% of the share (other than those in the North-east). To fund its share, the Centre will be levying a fee on all scheduled domestic aircraft plying on routes other than category II and category IIA. Carriers are expected to pass on this levy to air passengers.
Among the concessions to be provided by central and state governments to bring down the operational expenses of carriers is the proposal to levy excise duty at a rate of 2% on aviation turbine fuel (ATF) purchased at RCS airports. States are also expected to reduce VAT on ATF to 1% or less and provide security & fire services free of cost.
After a state seeks the inclusion of an airport under RCS’ ambit, route proposals would be offered for competitive bidding. RCS would also be applicable to airlines which intend to undertake cargo operations, though VGF would not be provided for such operations.
Besides the focus on regional connectivity, the NCAP has tried to correct the historically poor environment for the maintenance, repair and the overhaul (MRO) sector which has been burdened with heavy taxation. The policy exempts companies engaged in the business from certain taxes. This has been touted as a game-changer.
“The MRO business of Indian carriers is worth around R5,000 crore, 90% of which is spent outside India—in Sri Lanka, Singapore, Malaysia, UAE, etc. Given our technology and skill base, the government is keen to develop India as an MRO hub in Asia,” the policy says.
“The tax regime in India has been a dampener so far. Its abolition would encourage domestic airlines companies to get their MRO work done locally. Besides, with the fleet size of domestic carriers expected to grow over the long term, the local MRO industry becomes critical because maintenance expenses constitute 10-15% of the total operating cost of an airline,” ratings agency CRISIL has said in a report.
The policy says the Centre would be asking state governments not to apply VAT on the MRO sector. However, this has been criticised by experts who feel it should have been more forthright about the exemptions from state governments.
As for the second important sectoral development, the decision to allow 100% FDI in Indian carriers, experts think it does not go the full distance. The new regime says FDI from foreign airlines in a domestic carrier would remain restricted to 49% but any other foreign investor, say a sovereign wealth fund, unrelated to the airline can hold the remaining 51% stake. So, if a foreign investor wants to wholly own a domestic scheduled airline, its lack of association with a foreign airline company would have to be ascertained.
“The intention is to attract foreign funds for the sector. For the time being, we don’t want foreign airlines to have a majority stake in domestic carriers. We have taken a calibrated approach to liberalising the sector,” Civil Aviation Secretary Rajeev Nayan Choubey said. If the government’s future experience suggests that foreign airlines can be allowed to own domestic carriers, the current cap on their equity (49%) may be done away with, he added. Since the government will vet proposals on a case-to-case basis, it would have the last word on which foreign investor passes muster and which doesn’t, not the ideal scenario as far as ease of doing business is concerned.
Amber Dubey, partner and India head of aerospace and defence at KPMG, says, “The govt should have avoided capping the foreign airline stake at 49%. Every such restriction only creates more paperwork and controversies. It neither helps investors nor India. We hope the govt will raise the FDI limit for foreign airlines to 100% soon.”