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.
As of April 20, 2020, there are 17,265 confirmed cases of COVID-19 in India. Since April 13, 8,113 new cases have been registered. Out of the confirmed cases so far, 2,547 patients have been cured/discharged and 543 have died. As the spread of COVID-19 has increased across India, the central government has continued to announce several policy decisions to contain the spread, and support citizens and businesses who are being affected by the pandemic. In this blog post, we summarise some of the key measures taken by the central government in this regard between April 13 and April 20, 2020.
Source: Ministry of Health and Family Welfare, PRS.
Lockdown
Lockdown to remain in force until May 3, 2020
The lockdown has been extended until May 3, 2020 with certain relaxations taking force as of April 20, 2020. Activities that continue to remain prohibited after April 20, 2020 include: (i) all international and domestic travel except for healthcare workers and security purposes, (ii) passenger travel in trains, buses and taxis, (iii) industrial activities and hospitality services (other than those permitted), (iv) all educational institutions, and (v) all religious gatherings. Activities that are permitted after April 20, 2020 include: (i) all health services such as hospitals, clinics, and vets, (ii) agricultural operations, fisheries, and plantations, (iii) public utilities including provision of LPG and postal services, (iv) financial establishments such as non-banking financial institutions, banks and ATMs, (v) e-commerce for essential goods only, and (vi) industrial activities such as oil and gas refineries and manufacturing. Persons who do not follow the lockdown may be punishable with imprisonment up to one year and a fine, or both. States and union territories may not dilute these lockdown guidelines specified by the central government. However, they may implement stricter measures.
Certain areas within hotspots demarcated as containment zones
Hotspots refer to areas where there are large COVID-19 outbreaks or clusters with a significant spread of COVID-19. Within hotspots, certain areas may be demarcated as containment zones by the state or district administrations. There will be a strict perimeter control in the containment zones. Inward and outward movement from the containment zones will be restricted except for essential services such as medical emergencies, and law and order related activities.
Movement of stranded migrant labour
The Ministry of Home Affairs has permitted the movement of stranded migrant labour within the state in which they are stranded for work in activities permitted after the relaxation of the lockdown on April 20, 2020. These activities include industrial work, manufacturing, and construction. State governments may undertake skill mapping of migrant labourers and transport them to worksites if they are asymptomatic and willing to work. Movement of migrant labour across state borders continues to be prohibited.
Financial Measures
RBI announced additional measures to combat economic situation due to COVID-19
The International Monetary Fund’s Economic Counsellor has estimated the cumulative loss over 2020 and 2021 to global GDP due to the global economic lockdown to be around 9 trillion dollars. To combat the economic impact of COVID-19 in India, the Reserve Bank of India (RBI) has announced several additional measures. These include: (i) reduction in reverse repo rate from 4% to 3.75%, (ii) targeted long-term repo operations for an aggregate amount of Rs 50,000 crore, (iii) refinancing of financial institutions such as National Bank for Agriculture and Rural Development, Small Industries Development Bank of India, and National Housing Bank for a total amount of Rs 50,000 crore to enable them to meet the financing needs of sectors they cater to.
Dividend payments by banks
In light of the economic impact of COVID-19, the RBI announced that banks shall not make any further dividend payouts from the profits pertaining to the financial year which ended on March 31, 2020. According to RBI, this will allow banks to conserve capital to retain their capacity to support the economy and absorb losses. This restriction will be reassessed based on the financial results of banks for the quarter ending in on September 30, 2020.
Short term credit to states
RBI has announced an increase in the Ways and Means Advances (WMA) limits for states and UTs. WMA limits refer to temporary loans given by the RBI to state governments. The WMA limit has been increased by 60% from the limit as on March 31, 2020, for all states and UTs. The revised limits will be in force between April 1 and September 30, 2020.
Travel and export
Travel restrictions to continue
Since the lockdown has been extended until May 3, 2020, domestic and international travel remains prohibited. All domestic and international flights will not function until May 3, 2020. Further, the Director General of Civil Aviation has specified that airlines should not start allowing ticket bookings from May 4, 2020 onwards as there has been no clearance for such activities to commence. All passenger trains will also remain cancelled until May 3, 2020. There will be a full refund for flight tickets purchased during the lockdown period for travel before May 3, 2020. Further, there will be a full refund for tickets booked for trains that were cancelled during the lockdown and cancellation of advance bookings of tickets for trains not yet cancelled.
Export of paracetamol
The Ministry of Commerce and Industry has specified that formulations made of paracetamol may be freely exported from April 17, 2020 onwards. However, the export of paracetamol active pharmaceutical ingredients (APIs) will continue to be restricted. On March 3, 2020, the export of both formulations made of paracetamol and paracetamol APIs was restricted.
For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.