Issues
Aviation supports 1.7 million Indian jobs and contributes 0.5% of India's GDP. And that is just the beginning. It could do much more. Connectivity is the backbone of today's global economy--bringing people to business, tourists to vacation destinations and products to markets. All are important to India's development. On an average, Indians travel by plane once in ten years, while Americans travel 1.8 times each year. If Indians travelled as frequently as Americans, the market would be 2.1 billion travelers instead of today's 120 million.
But instead of flourishing and delivering economic benefits, India's aviation industry is struggling. The twin shocks of skyrocketing oil prices followed by the global financial crisis hit in 2008-just as India was gearing up for high speed aviation growth. Four years later, the sector's recovery is hampered by high taxes, insufficient infrastructure, high costs and restrictive investment policies.
AAI against Kolkata, Chennai airport privatisation
Airports Authority of India (AAI) is opposed to the government's proposal of privatising the Kolkata and Chennai airports, its highest revenue earners, arguing that it is well equipped to manage the facilities, and such decisions can merely undermine the public sector.

Criticising Planning Commission's logic that slow commercial decision-making at AAI was the reason for privatisation of these two airports, senior officials at the PSU expressed fear about the state-owned company's fate if management of all good airports is taken away from it.

"Why aren't the rigid checks and balances relaxed a little for us? Then, we will also be commercially flexible. If public sector is weak, privatising is not the solution. Strengthen your public sector instead of calling in private parties, who don't really care about welfare," senior AAI officials said, hinting at the high airport charges levied by private developers at various metro airports in India.

The state-run AAI has been modernising airports at Chennai and Kolkata at Rs 2,100 crore and Rs 2,350 crore, respectively. While Chennai airport is waiting to be inaugurated next month, Kolkata airport may get completed by October.

When asked, AAI chairman VP Agarwal declined to comment on the opposition to public private partnership (PPP) for Kolkata and Chennai airports, saying AAI is not starved of resources. "We can manage both the airports if we get cheaper interest rates. We sought permission to float bonds worth Rs 4,000 crore four months ago from the government but there's still no response," Agarwal told ET. In a meeting between Planning Commission deputy chairman Montek Singh Ahluwalia, advisor Gajendra Haldea and civil aviation minister Ajit Singh in May, it was decided to put these two airports on PPP mode, similar to those in Delhi and Mumbai.

High taxes
Indian aviation is overtaxed. The 12.36% service tax on air tickets and services that airlines purchase such as landing and air navigation, contravenes global norms and handicaps the Indian industry. Even more damaging is India's equally unique tax burden on aviation turbine fuel. Domestic fuel uplift is subject to an 8.24% excise duty and state taxes that are as high as 30%. Globally, fuel accounts for about 34% of an airline's cost structure.
In India, because of high taxes, it accounts for 45%. This is destroying the competitiveness of Indian airlines. The civil aviation ministry officials understand this. But their colleagues in the finance ministries-at state and national levels-have not yet appreciated the devastating impact of high taxes. And then there is the invisible impact of the lost opportunities for jobs and growth in the broader economy due to the high cost of connectivity.
A coordinated effort focused on growth is needed. Taxes-particularly the crippling state fuel taxes-must be removed to gain broader economic benefits.
Rising Costs
Alongside taxes, the rising costs at India's only hub airport is also hampering aviation's ability to deliver broader economic benefits. The Airports Economic Regulatory Authority (AERA) approved a 346% increase for charges at Delhi's Indira Gandhi International Airport, placing Delhi among the world's most expensive airports. Based on experience at other airports, in the first year alone, we can expect that the increased costs will reduce passenger air travel in that year by between 7% and 10.5%. This will have a knock-on effect on the businesses dependent on connectivity. And it could be the start of a downward spiral that dismantles Delhi's ambition to play a key role as a major regional hub.
Successful aviation hubs such as Beijing, Singapore, Bangkok and Dubai are keeping charges low, stable and at times discounted. For example, Beijing invested in a new terminal and runway, and yet its charges are one third the cost of Delhi. Mumbai may well follow Delhi with a similar exponential increase in charges. This would be a confirmation that India's private airports and the regulatory environment in which they operate are ignoring the competitive dynamics in the region.
Investment hurdles
India's airlines need capital to grow. While the 49% cap on foreign investment aligns with general practice globally, the complete exclusion of foreign airlines from investing in Indian carriers is unique to India. Given that foreign airlines could own 100% of mass rapid transit systems, ports, hotels, toll roads or tunnels, the restriction makes little sense alongside India's other foreign investment policies. It is encouraging that the finance minister highlighted the need to change this restriction when he announced the Union Budget. This would allow strategic tie-ups with foreign airlines cemented by an equity stake.
But we must be very clear. Allowing foreign airlines to invest in Indian aviation is not a panacea. Without addressing the costs, taxes and infrastructure, it could be a theoretical exercise.
Policies
The government will soon bring out a new aviation policy that will focus on airline sustainability - and hence safety in operations. For this purpose, the new policy will focus on ensuring that airline fares are reflective of their total costs to ensure that neither are fares so high that the consumer is fleeced, nor lowered by some carriers (predatory pricing) so much that others find it hard to survive.
"The ministry of civil aviation is working out a policy to factor in needs of the fast-growing sector over the next decade. We have about five months to complete the process," aviation secretary Nasim Zaidi said . The proposed economic regulatory mechanism for airfare pricing is significant as in recent months private airlines have been accusing national carrier Air India of charging very low fares to show improved aircraft occupancy. The private players complain that while AI will get thousands of crores from the government, they have to recover their cost to survive.
Private Sector Participation and the Civil Aviation Policy · Private sector participation will be a major thrust area in the civil aviation sector for promoting investment, improving quality and efficiency and increasing competition.
· Competitive regulatory framework with minimal controls encourages entry and operation of private airlines/ airports.
· Encouragement of private sector investment in the construction, upgradation and operation of new and existing airports including cargo related infrastructure.
· Rationalization of various charges and price of ATF/AVGas will be undertaken to render operation of smaller aircraft viable so as to encourage major investment in feeder and regional air services by the private sector.
· Training Institutes for pilots, flight engineers, maintenance personnel, air-traffic controller, and security will be encouraged in private sector.
· Private sector investment in non-aeronautical activities like shopping complex, golf course, Entertainment Park, aero-sports etc. near airports will be encouraged to increase revenue, improve viability of airports and to promote tourism. CAA will ensure that this is not at the cost of primary aeronautical functions, and is consistent with the security requirements.
· Government will gradually reduce its equity in PSUs in the sector.
· Government will encourage employee participation through issue of shares and ESOP