Editorial Notes

[Editorial Notes] Giving wings to better air connectivity

Governments are poised for the growth as they have the potential to strengthen their partnership under the cooperative federalism framework to provide the required impetus to the aviation sector.
By IASToppers
August 30, 2019

Content

  • Introduction
  • Current status of Aviation sector
  • What are the key policy intervention that are needed?
  • Conclusion
  • Key Facts
  • IT’s Input
    • UDAN scheme

Giving wings to better air connectivity

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Introduction

  • In the past, Civil Aviation in India barely get any significant attention from the government, even though it is a Central subject.

Giving-wings-to-better-air-connectivity

  • Until last four years, states have to look up to the central government for the development of airports and enhancing air connectivity. However, situation has now changed.

Current status of Aviation sector

  • In last four years, the states are seen as a major factor in the growth of the civil aviation sector.
  • The Regional Connectivity Scheme, Ude Desh ka Aam Naagrik (UDAN), has become a game changer as this flagship programme has a built-in mechanism to develop stakes of State governments in the growth aviation sector.
  • The policies of States and Centre are now being interlinked to make flying accessible and affordable.

What are the key policy intervention that are needed?

Reducing VAT on Aviation Turbine Fuel

UDAN_1

  • The cost of Aviation Turbine Fuel (ATF) forms about 40% of the total operational cost for any Indian airline.
  • Keeping petroleum products (i.e. ATF) out of the purview of Goods and Services Tax (GST) may be a policy imperative for the State governments but this is a step that adversely impacts the expansion of air services to the States.
  • States have very high rates of value-added tax (VAT) on ATF (sometimes as high as 25%) which has dampened the growth trajectory of airlines.
  • Reducing VAT on ATF is the biggest lever States can operate, which will enable them in being an equal partner in steering sector policy.
  • The airline industry is capital-intensive and works on very thin profit margins. Therefore, relief on ATF is a major incentive for airlines to augment their operations.

The development and management of airports

  • There are many regional airports which can be developed by States on their own or in collaboration with the Airports Authority of India (AAI).
  • Different models of public-private-partnership can be leveraged to develop infrastructures.
  • Land involves huge capital and is a scarce resource. Innovative models can be explored to create viable ‘no-frill airports (airport which are built on small budget and have the only basic safety and security features without having fancy lounges, aerobridges, escalators etc).
  • India had about 70 airports since Independence until recently.
  • Under UDAN, the Union government, with the help of the States, has operationalised 24 un-served airports over the past two years and 100 more are to be developed in the next five years,
  • This can only be achieved through the active collaboration between willing States and the Centre.

Supporting airlines to develop air services in the remote regions

  • States and the Central government can play a crucial role in supporting airlines to develop air services in the remote regions.
  • To reduce operational cost of airlines, incentives from State governments have been sought.
  • The incentives could be in the form of VAT reduction, sharing of viability gap funding with airlines as well as non-financial incentives like providing security and fire services free of cost.
  • Under UDAAN Scheme, Union government has declared concessions on excise duty on ATF and made budgetary allocations for airport development which encouraged airlines to operate in unconnected regions.
  • Considering the infrastructural constraints and difficult terrain, small aircraft operators need to be encouraged.

Conclusion

  • Currently the penetration of the aviation market in India stands at 7%. However, there is potential to be among the global top three nations in terms of passenger traffic.
  • For this, States need to create a conducive business environment to facilitate the strong aspirations of a burgeoning Indian middle class to fly at least once a year.
  • Developing airports, incentivising airlines and pooling resources of both the Union and State governments can accelerate the growth of the Indian civil aviation sector which would be equitable and inclusive.

Key Facts

  • The aviation sector has a multiplier effect on the economy. An International Civil Aviation Organization (ICAO) study has shown that the output multiplier and employment multiplier of civil aviation are 3.25 and 6.10.

IT’s Input

UDAN scheme

UDAN

  • UDAN (Ude Desh ka Aam Naagrik) is a scheme of Ministry of Civil aviation to develop regional airport and to give a boost to regional connectivity.
  • It is a component of the National Civil Aviation Policy (NCAP) which was released in June 2016.
  • It is aimed at making air travel affordable and widespread, to boost inclusive national economic development, job growth and air transport infrastructure development.
  • It aims to stimulate regional connectivity with flights covering distances up to 800 km through a market-based mechanism.
  • The states will make sufficient land available; ensure adequate security; and provide essential services at concessional rates for the airports or air strips.
  • Air India’s subsidiary Alliance Air will be the first airline to start operating flights between Delhi and Shimla under the Regional Connectivity Scheme (RCS).
  • The Viabilty Gap Funding (VGF) will be used to bridge the gap between the cost of airline operations and expected revenue.
  • UDAN has motivated State governments to reduce the VAT on ATF to 1% for the flights that are operated under this scheme.

 

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