Yesterday, the Telecom and Regulatory Authority of India (TRAI) released the Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016. These regulations prohibit Telecom Service Providers from charging different tariffs from consumers for accessing different services online. A lot of debate has taken place around network (net) neutrality in India, in the past few months. This blog post seeks to present an overview of the developments around net neutrality in India, and perspectives of various stakeholders. Who are the different stakeholders in the internet space? To understand the concept of net neutrality, it is important to note the four different kinds of stakeholders in the internet space that may be affected by the issue. They are: (i) the consumers of any internet service, (ii) the Telecom Service Providers (TSPs) or Internet Service Providers (ISPs), (iii) the over-the-top (OTT) service providers (those who provide internet access services such as websites and applications), and (iv) the government, who may regulate and define relationships between these players. TRAI is an independent regulator in the telecom sector, which mainly regulates TSPs and their licensing conditions, etc., What is net neutrality? The principle of net neutrality states that internet users should be able to access all content on the internet without being discriminated by TSPs. This means that (i) all websites or applications should be treated equally by TSPs, (ii) all applications should be allowed to be accessed at the same internet speed, and (iii) all applications should be accessible for the same cost. The 2016 regulations that TRAI has released largely deal with the third aspect of net neutrality, relating to cost. What are OTT services? OTT services and applications are basically online content. These are accessible over the internet and made available on the network offered by TSPs. OTT providers may be hosted by TSPs or ISPs such as Bharti Airtel, Vodafone, Idea, VSNL (government provided), etc. They offer internet access services such as Skype, Viber, WhatsApp, Facebook, Google and so on. Therefore, OTT services can broadly be of three types: (i) e-commerce, (ii) video or music streaming and, (iii) voice over internet telephony/protocol services (or VoIP communication services that allow calls and messages). Prior to the recent TRAI regulations prohibiting discriminatory tariffs, there was no specific law or regulation directly concerning the services provided by OTT service providers. How is net neutrality regulated? Until now, net neutrality has not directly been regulated in India by any law or policy framework. Over the last year, there have been some developments with respect to the formulation of a net neutrality policy. TRAI had invited comments on consultation papers on Differential Pricing for Data Services as well as Regulatory Framework for Over-The-Top Services (OTT).[i],[ii] A Committee set up by the Department of Telecommunications (DoT) had also examined the issue of net neutrality.[iii] Internationally, countries like the USA, Japan, Brazil, Chile, Norway, etc. have some form of law, order or regulatory framework in place that affects net neutrality. The US Federal Communications Commission (telecom regulator in the USA) released new internet rules in March 2015, which mainly disallow: (i) blocking, (ii) throttling or slowing down, and (iii) paid prioritisation of certain applications over others.[iv] While the UK does not allow blocking or throttling of OTT services, it allows price discrimination. What do TRAI’s 2016 Regulations say? The latest TRAI regulations state that: (i) no service provider is allowed to enter into any agreement or contract that would result in discriminatory tariffs being charged to a consumer on the basis of content (data services), (ii) such tariffs will only be permitted in closed electronic communications networks, which are networks where data is neither received nor transmitted over the internet, (iii) a service provider may reduce tariff for accessing or providing emergency services, (iv) in case of contravention of these regulations, the service provider may have to pay Rs 50,000 per day of contravention, subject to a maximum of Rs 50 lakh, etc.[v] It may be noted that, in 2006 and 2008, TRAI had suggested that the internet sector remain unregulated and non-discriminatory (net neutral).[vi][vii] What are some of the key issues and perspectives of various stakeholders on net neutrality? TSPs and ISPs: TSPs invest in network infrastructure and acquire spectrum, without getting a share in the revenue of the OTT service providers. Some have argued that the investment by TSPs in internet infrastructure or penetration levels would diminish if they are not permitted to practice differential pricing, due to a lack of incentive. Another contention of the TSPs is that certain websites or applications require higher bandwidth than others. For example, websites that stream video content utilise much more bandwidth than smaller messaging applications, for which the TSPs need to build and upgrade network infrastructure. The Committee set up by DoT had recommended that the TSPs may need to better manage online traffic so that there is better quality of service for consumers and no network congestion. Further, the Committee also said that in case of local and national calls, TSP (regular calling) and OTT communication services (calls made over the internet) may be treated similarly for regulatory purposes. However, in case of international VoIP calling services and other OTT services, it did not recommend such regulatory oversight. Consumers and/or OTT service providers: The Committee set up by the DoT said that the core principles of net neutrality (equal treatment and equality in speed and cost) should be adhered to. It also said that OTT services (online content) enhance consumer welfare and increase productivity in many areas. These services should be actively encouraged. In the absence of neutrality, the internet may be fragmented and not as easily accessible to those who are unable to pay for certain services. It has been said that discrimination of internet content by TSPs could be detrimental to innovation as the bigger market players would be able to pay their way out of being throttled. This could potentially result in TSPs restricting consumers’ access to small-scale, but innovative or qualitative OTT services (restricting growth and innovation for start-ups too). Now that regulations regarding price discrimination are in force, we do not know whether TRAI or the government will enforce rules regarding other aspects of net neutrality. Also, the extent to which these regulations would affect the business of TSPs and OTT service providers remains to be seen. [i] “Consultation Paper on Differential Pricing for Data Services”, the Telecom Regulatory Authority of India, December 9, 2015, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/CP-Differential-Pricing-09122015.pdf. [ii] “Consultation Paper on Regulatory Framework for Over-the-top (OTT) services”, TRAI, March 27, 2015, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/OTT-CP-27032015.pdf. [iii] “Net Neutrality, DoT Committee Report”, Ministry of Communications and Information Technology, May 2015, http://www.dot.gov.in/sites/default/files/u10/Net_Neutrality_Committee_report%20%281%29.pdf. [iv] “In the Matter of Protecting and Promoting the Open Internet: Report and Order on Remand, Declaratory Ruling, and Order”, Federal Communications Commission USA, February 26, 2015, http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db0403/FCC-15-24A1.pdf. [v] “Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016”, TRAI, February 8, 2016. [vi] “Consultation Paper on Review of Internet Services”, TRAI, December 2006, http://www.trai.gov.in/WriteReaddata/ConsultationPaper/Document/consultation27dec06.pdf. [vii] “Recommendations on Issues related to Internet Telephony”, TRAI, August 18, 2008, http://www.trai.gov.in/WriteReadData/Recommendation/Documents/recom18aug08.pdf.
India is one of the fastest growing aviation markets in the world. Its domestic traffic makes up 69% of the total airline traffic in South Asia. India’s airport capacity is expected to handle 1 billion trips annually by 2023. The Ministry of Civil Aviation is responsible for formulating national aviation policies and programmes. Today, Lok Sabha will discuss and vote upon the budget of the Ministry of Civil Aviation. In light of this, we discuss key issues with the aviation sector in India.
The aviation sector came under severe financial stress during the Covid-19 pandemic. After air travel was suspended in March 2020, airline operators in India reported losses worth more than Rs 19,500 crore while airports reported losses worth more than Rs 5,120 crore. However, several airline companies were under financial stress before the pandemic affected passenger travel. For instance, in the past 15 years, seventeen airlines have exited the market. Out of those, two airlines, Air Odisha Aviation Pvt Ltd and Deccan Charters Pvt Ltd exited the market in 2020. Air India has been reporting consistent losses over the past four years. All other major private airlines in India such as Indigo and Spice Jet faced losses in 2018-19.
Figure 1: Operating profit/loss of major airlines in India (in Rs crore)
Note: Vistara Airlines commenced operations in 2015, while Air Asia began in 2014; Negative values indicate operating loss.
Source: Unstarred Question 1812 answered on August 4, 2021, and Unstarred Question 1127 answered on September 21, 2020; Rajya Sabha; PRS.
Sale of Air India
Air India has accounted for the biggest expenditure head of the Ministry of Civil Aviation since 2011-12. Between 2009-10 and 2020-21, the government spent Rs 1,22,542 crore on Air India through budgeted allocations. In October 2021, the sale of Air India to Talace Ltd., which is a subsidiary of Tata Sons Pvt Ltd, was approved. The bid for Air India was finalised at Rs 18,000 crore.
Up to January 2020, Air India had accumulated debt worth Rs 60,000 crore. The central government is repaying this debt in the financial year 2021-22. After the finalisation of the sale, the government allocated roughly Rs 71,000 crore for expenses related to Air India.
In addition to loan repayment, in 2021-22, the government will provide Air India with a fresh loan (Rs 4,500 crore) and grants (Rs 1,944 crore) to recover from the shock of Covid-19. To pay for the medical benefits of retired employees of Air India, a recurring expense of Rs 165 crore will be borne by the central government each year.
In 2022-23, Rs 9,260 crore is allocated towards servicing the debt of AIAHL (see Table 1). AIAHL is a Special Purpose Vehicle (SPV) formed by the government to hold the assets and liabilities of Air India while the process of its sale takes place.
Table 1: Breakdown of expenditure on Air India (in Rs crore)
|
Major Head |
2020-21 Actual |
2021-22 RE |
2022-23 BE |
% change from 2021-22 RE to 2022-23 BE |
|
|
Equity infusion in AIAHL |
- |
62,057 |
- |
-100% |
|
|
Debt servicing of AIAHL |
2,184 |
2,217 |
9,260 |
318% |
|
|
Medical benefit to retired employees |
- |
165 |
165 |
0% |
|
|
Loans to AI |
- |
4,500 |
- |
-100% |
|
|
Grants for cash losses during Covid-19 |
- |
1,944 |
- |
-100% |
|
|
Total |
2,184 |
70,883 |
9,425 |
-87% |
|
Note: BE – Budget Estimate; RE – Revised Estimate; AAI: Airports Authority of India; AIAHL – Air India Asset Holding Limited; AI – Air India. Percentage change is from RE 2021-22 to BE 2022-23.
Source: Demands for Grants 2022-23, Ministry of Civil Aviation; PRS.
Privatisation of Airports
Airports Authority of India (AAI) is responsible for creating, upgrading, maintaining and managing civil aviation infrastructure in the country. As on June 23, 2020, it operates and manages 137 airports in the country. Domestic air traffic has more than doubled from around 61 million passengers in 2013-14 to around 137 million in 2019-20. International passenger traffic has grown from 47 million in 2013-14 to around 67 million in 2019-20, registering a growth of over 6% per annum. As a result, airports in India are witnessing rising levels of congestion. Most major airports are operating at 85% to 120% of their handling capacity. In response to this, the government has decided to privatise some airports to address the problem of congestion.
AAI has leased out eight of its airports through Public Private Partnership (PPP) for operation, management and development on long term lease basis. Six of these airports namely, Ahmedabad, Jaipur, Lucknow, Guwahati, Thiruvananthapuram, and Mangaluru have been leased out to M/s Adani Enterprises Limited (AEL) for 50 years (under PPP). The ownership of these airports remains with AAI and the operations will be back with AAI after the concession period is over. The Standing Committee on Transport (2021) had noted that the government expects to have 24 PPP airports by 2024.
Figure 2: Allocation towards AAI (in Rs crore)
Note: BE – Budget Estimate; RE – Revised Estimate; AAI – Airports Authority of India; IEBR – Internal and Extra-Budgetary Resources;
Source: Demand for Grant documents, Ministry of Civil Aviation; PRS.
The Committee also noted a structural issue in the way airport concessions are given. As of now, entities that bid the highest amount are given the rights to operate an airport. This leads them to pass on the high charge to airline operators. This system does not consider the actual cost of the services and leads to an arbitrary increase in the cost of airline operators. The Ministry sees the role of AAI in future policy issues to include providing high quality, safe and customer-oriented airport and air navigation services. In 2022-23, the government has allocated Rs 150 crore to AAI, which is almost ten times higher than the budget estimates of 2021-22.
Regional Connectivity Scheme (RCS-UDAN)
The top 15 airports in the country account for about 83% of the total passenger traffic. These airports are also close to their saturation limit, and hence the Ministry notes that there is a need to add more Tier-II and Tier-III cities to the aviation network. The Regional Connectivity Scheme was introduced in 2016 to stimulate regional air connectivity and make air travel affordable to the masses. The budget for this scheme is Rs 4,500 crore over five years from 2016-17 to 2021-22. As of December 16, 2021, 46% of this amount has been released. In 2022-23, the scheme has been allocated Rs 601 crore, which is 60% lower than the revised estimates of 2021-22 (Rs 994 crore).
Under the scheme, airline operators are incentivised to operate on under-served routes by providing them with viability gap funding and airport fee waivers. AAI, which is the implementing agency of this scheme, has sanctioned 948 routes to boost regional connectivity. As of January 31, 2022, 43% of these routes have been operationalised. As per the Ministry, lack of availability of land and creation of regional infrastructure has led to delays in the scheme. Issues with obtaining licenses and unsustainable operation of awarded routes also contribute to the delay. As per the Ministry, these issues, along with the setback faced due to the pandemic acted as major obstacles for the effective utilisation of funds.
Figure 3: Expenditure on Regional Connectivity Scheme (in Rs crore)
Note: BE – Budget Estimate; RE – Revised Estimate;
Source: Demand for Grants documents, Ministry of Civil Aviation; PRS.
Potential of air cargo
The Standing Committee on Transport (2021) had noted India’s cargo industry’s huge potential with respect to its geographical location, its growing economy, and its growth in domestic and international trade in the last decade. In 2019-20, all Indian airports together handled 3.33 million metric tonnes (MMT) of freight. This is much lower than the cargo handled by Hong Kong (4.5 MMT), Memphis (4.8 MMT), and Shanghai (3.7 MMT), which are the top three airports in terms of the volume of freight handled. The Standing Committee on Transport (2021) has noted inadequate infrastructure as a major bottleneck in developing the country’s air cargo sector. To reduce such bottleneck, it recommended the Ministry to establish dedicated cargo airports, and automate air cargo procedures and information systems to streamline redundant processes.
The Committee has also highlighted that the Open Sky Policy enables foreign cargo carriers to freely operate cargo services to and from any airports in India having customs/immigration facilities. They account for 90-95% of the total international cargo carried to and from the country. On the other hand, Indian air cargo operators face discriminatory practices and regulatory impediments for operating international cargo flights in foreign countries. The Committee urged the Ministry to provide a level-playing field for Indian air cargo operators and to ensure equal opportunities for them. The Ministry revised the Open Sky Policy in December 2020. Under the revised policy, the operations of foreign ad hoc and pure non-scheduled freighter charter service flights have been restricted to six airports - Bengaluru, Chennai, Delhi, Kolkata, Hyderabad, and Mumbai.
Rising cost of Aviation Turbine Fuel
The cost of Aviation Turbine Fuel (ATF) forms around 40% of the total operating cost of airlines and impacts their financial viability. ATF prices have been consistently rising over the past years, placing stress on the balance sheets of airline companies. As per recent news reports, airfares are expected to rise as the conflict between Russia and Ukraine is making ATF costlier.
ATF attracts VAT which is variable across states and does not have a provision for input tax credit. High rates of aviation fuel coupled with high VAT rates are adversely affecting airline companies.
Table 2: Expenditure on ATF by airlines over the years (in Rs crore)
|
Year |
National Carriers |
Private Domestic Airlines |
|
2016-17 |
7,286 |
10,506 |
|
2017-18 |
8,563 |
13,596 |
|
2018-19 |
11,788 |
20,662 |
|
2019-20 |
11,103 |
23,354 |
|
2020-21 |
3,047 |
7,452 |
Source: Unstarred Question 2581, Rajya Sabha; PRS.
The Ministry, in January 2020, has reduced the tax burden on ATF by eliminating fuel throughput charges that were levied by airport operators at all airports across India. Central excise on ATF was reduced from 14% to 11% w.e.f. October 11, 2018. State governments have also reduced VAT/Sales Tax on ATF drawn on RCS airports to 1% or less for 10 years. For non-RCS-UDAN operations, various state governments have reduced VAT/Sales Tax on ATF to within 5%. The Standing Committee on Transport (2021) has recommended ATF to be included within the ambit of GST and that applicable GST should not exceed 12% on ATF with full Input Tax Credit.
For more details, please refer to the Demand for Grants Analysis of the Ministry of Civil Aviation, 2022-23.
