Economics Editorial✍ Hindu Edi Prelims cum Mains

Giving wings to better air connectivity

Till recently, civil aviation got little attention from States:

  • Civil aviation is a Central subject and it barely got significant attention from the States until recently.
  • This is clear from the fact that very few States in India have active civil aviation departments.
  • States have had a passive role, looking up to the Central government for the development of airports and enhancing air connectivity.

Now States playing active role:

  • In the last four years, the situation has changed considerably.
  • The cooperation of States is seen as a major factor in the growth of the civil aviation sector.
  • UDAN: The Regional Connectivity Scheme, UdeDeshkaAamNaagrik (UDAN), has become a game changer as this flagship programme has a built-in mechanism to develop stakes of State governments in the growth of the sector.

Cooperative federalism in the sector:

  • 30 States and UTs have already signed memoranda of understanding (MoUs) with the Central government.
  • The policies of States and Centre are now being interlinked to make flying accessible and affordable.
  • Strengthen of Centre and State partnership under the cooperative federalism framework provides the required impetus to the sector.

Policy interventions to jump-start the aviation market:

1) Reducing VAT on ATF

High ATF costs currently:

  • States have very high rates of value-added tax (VAT) on Aviation Turbine Fuel (ATF)— sometimes as high as 25%.
  • For any airline in India, the cost of ATF forms about 40% of the total operational cost.
  • This has has dampened the growth trajectory of civil aviation.

VAT cut would help airlines:

  • 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.
  • UDAN has already motivated State governments to reduce the VAT on ATF to 1% for the flights that are operated under this scheme.

Any loss can be recovered from boost in economic activity:

  • For States, cut in VAT on ATF would be a notional revenue loss which can be offset by enhanced economic activities as a result of increased air connectivity to the region.
  • 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, respectively.
  • This has already been proved in many airports within India where the connectivity has changed the economic landscape in a positive way.

2) Improvements in airport development and management

  • There are many regional airports which can be developed by States on their own or in collaboration with the Airports Authority of India (AAI).
  • Innovative models can be explored to create viable ‘no-frill airports’; these functional airports can open up regions and change the way people travel.
  • India had about 70 airports since Independence until recently.
  • Under UDAN, the Union government, with the help of the States, has operationalised 24 unserved airports over the past two years; 100 more are to be developed in the next five years, which can only be achieved through the active collaboration between willing States and the Centre.

3) Incentives to airlines to prove air-links to the hinterland

Air connectivity to difficult regions is indispensable:

  • Areas which cannot be connected meaningfully by road or rail have to be linked by air.
  • Air connectivity to difficult regions is indispensable.
  • Air connectivity would not only bring down travel time but also be a boon in emergencies.
  • This is also true for northeast India, the islands and also hilly States.
Related image

Support from Centre and States:

  • States and the Central government can play a crucial role in supporting airlines to develop air services in the remote regions.
  • Market appetite and aspirations of remote areas can match the plans of airlines where States play a catalytic role.
  • Under UDAN, some success stories have motivated States to announce innovative approaches and policies in support of airlines.
  • Incentives State governments can provide:
    • To reduce operational cost of airlines and airport operators, incentives from State governments have been sought:
      • Financial support such as VAT reduction
      • Sharing of viability gap funding with airline
      • Non-financial incentives such as providing security and fire services free of cost to airport operators
  • Union government incentives:
    • Under the UDAN scheme, the Union government has declared concessions on excise duty on ATF and made budgetary allocations for airport development.
    • This scheme has been successful in encouraging airlines to operate on regional unconnected routes instead of trunk routes.

Further interventions are necessary:

  • To attract airlines from regional to remote connectivity, further interventions are necessary.
  • Considering the infrastructural constraints and difficult terrain, small aircraft operators need to be encouraged.

4) Convergence of related schemes

  • Often there is compartmentalisation in implementation of schemes, while convergence is overlooked.
  • States may converge their relevant schemes relating to tourism, health, and insurance for supporting air connectivity to supplement the objectives of regional connectivity.

Conclusion:

  • Currently, the penetration of the aviation market in India stands at 7%.
  • There is potential for India to be among the global top three nations in terms of domestic and international passenger traffic.
  • Developing airports, incentivising airlines and pooling resources of both the Union and State governments can accelerate the harmonised growth of the Indian civil aviation sector which would be equitable and inclusive.

Importance:

GS Paper III: Economy

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