Petroleum Secretary S Sundareshan, while addressing a press Conference on Friday, announced the government’s decision to deregulate prices of petrol. Petrol prices shall now be subject to periodic revisions based on fluctuations in market prices. An immediate hike of Rs. 3.50 per litre has already been affected. Prices of diesel shall be deregulated in stages while those of kerosene and LPG shall continue to be regulated by the government. For the moment, diesel has been hiked by Rs. 2 per litre, kerosene by Rs. 3 per litre and LPG by Rs. 35 per cylinder. Crude to retail: Pricing and under-recoveries India imports about 80% of its crude oil requirement.  Therefore, the cost of petroleum products in India is linked to international prices. The Indian barrel of crude cost $78 in March 2010. Once crude is refined, it is ready for retail. This retail product, is then taxed by the government (both Centre and State) before it is sold to consumers. Taxes are levied primarily for two reasons: to discourage consumption and as a source of revenue. Taxes in India are in line with several developed nations, with the notable exception of the US (See Note 1) Before the current hike, taxes and duties in Delhi accounted for around 48% of the retail price of petrol and 24% of the retail price of diesel. (Click Here for details) Ideally, the retail prices of petroleum products should then be determined as: Retail prices = Cost of production + taxes + profit margins However, in practice, the government indicates the price at which PSU oil companies sell petroleum products. Since these oil companies cannot control the cost of crude (the primary driver of the cost of production) or the taxes, the net result is an effect on their profit margins. In cases where the cost of production and taxes exceeds the prescribed retail price, the profit margins become negative. These negative profit margins are called ‘under-recoveries’. When international crude prices rose above $130 in 2008, under-recoveries reached an all-time high of Rs. 103,292 crore. Even at much lower prices in 2009-10 (averaging at $70 per barrel), under-recoveries totalled Rs. 46,051 crore. (See Note 2) The latest move is an effort to reduce these under-recoveries. The government cited the recommendations of the Kirit Parkih Committee while announcing its decision (Summary - Kirit Parikh Committee report). Any alternatives to price hike? As is evident from above, under-recoveries can also be reduced by decreasing taxes. In fact, one might argue that by both taxing the product and offering a subsidy, the government is complicating the situation. Usually whenever subsidization coexists with taxation, it serves the purpose of redistribution. For example, taxes might be collected universally but subsidy be granted to the weaker sections only. However, this is not the case in the current situation. What needs to be noted here is that these taxes are a very significant source of revenue. In fact, the total taxes paid by the oil sector to the central and state governments were around 3% of GDP in 2008-09 (See Note 3). Reducing taxes now might make it difficult for successive governments to raise taxation rates on petroleum products again. Moreover, though taxes are levied both by the Centre and the States, the subsidy is borne only by the Centre. Hence, the current arrangement is beneficial to the States. Possible future scenarios The opposition has voiced concerns that the hike in prices is likely to lead to even higher inflation and will further burden the consumer. The Chief Economic Advisor to the Finance Ministry, Dr. Kaushik Basu, however, told the media that these changes would have a beneficial effect on the economy. According to him,

"The (decontrol of petrol prices), coupled with price increase for LPG (cooking gas) and kerosene, will have an immediate positive impact on inflation. I expect an increase of 0.9 percentage points in the monthly Wholesale Price Index (WPI) inflation".

 

However, he added, that since the hike in fuel prices would push down fiscal and revenue deficit,

"they will exert a downward pressure on prices… More importantly, from now on, if there is a global shortage and the international price of crude rises, this signal will be transmitted to the Indian consumer. It will rationalise the way we spend money, the kinds and amount of energy we use, and the cars we manufacture. It is an important step in making India a more efficient, global player”.

It remains to be seen how the actual situation pans out. Notes 1) Share of tax in retail price (%)

Country Petrol Diesel
France 61% 46%
Germany 63% 47%
Italy 59% 43%
Spain 52% 38%
UK 64% 57%
Japan 48% 34%
Canada 32% 25%
USA 14% 16%
India (Del) 48% 24%

Source:  Petroleum Planning and Analysis Cell, PRS (Data as of Feb, 2010) 2) Under-recoveries by oil companies (Rs Crore)

Year Petrol Diesel PDS Kerosene Domestic LPG Total
2004-05 150 2,154 9,480 8,362 20,146
2005-06 2,723 12,647 14,384 10,246 40,000
2006-07 2,027 18,776 17,883 10,701 49,387
2007-08 7,332 35,166 19,102 15,523 77,123
2008-09 5,181 52,286 28,225 17,600 103,292
2008-09 5,151 9,279 17,364 14,257 46,051

Source:  Petroleum Planning and Analysis Cell, PRS 3) Contribution to Central and State taxes by Oil Sector (2008-09)

Category Rs (crore)
Sales tax 63,349
Excise duty 60,875
Corporate tax 12,031
Customs duty 6,299
Others (Centre) 5,093
Other (State) 4,937
Profit petroleum 4,710
Dividend 4,504
Total 1,61,798

Source:  Petroleum Planning and Analysis Cell

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)

 image

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)

image

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)

image
 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.