The first Budget of the second term of the Narendra Modi government has been announced. And like everyone, the aviation sector was looking with hopeful eyes, just like they were for the past five years in the first mandate to the National Democratic Alliance (NDA). Amongst the many promises and commitments made today by the new Finance Minister Nirmala Sitharaman, here are a notable few on the aviation sector, and how they are expected to pan out.
One of the key statements of the government was about the opening up of Foreign Direct Investment (FDI) in aviation. In Budget 2019 speech, Sitharaman said, “The government will examine suggestions of further opening up of FDI in aviation, media, AVGC ((Animation, Visual effects, Gaming and Comics) , and insurance sectors in consultation with all stakeholders”.
Read it along with the commitment of the government to divest Air India, where the Ministry of Finance, “In view of current macro-economic parameters, the government would not only reinitiate the process of strategic disinvestment of Air India, but would offer more Central Public Sector Enterprises (CPSEs) for strategic participation by the private sector.”
This sounds like there will be many suitors for Air India, including foreign carriers who might want to walk into the lucrative Indian market on the back of Air India. But a look at the progress of the previous years points out how the regulations are at cross-purposes with each other.
Firstly, the government has hinted and assured that it will examine further opening up of FDI in aviation, but will not put out a timeline on it. So there is no guarantee that the FDI limit increase will go through. Even when it does, the current aviation regulations ask for Substantial Ownership and Effective Control to be based in India. Is it not a legitimate request from an investor to have control on an entity in which they are a majority stakeholder? Hence, the government will have to revisit its stance on the control requirements before it gets any suitable interest in the sale of Air India.
The government also promised to “adopt suitable policy interventions to create a congenial atmosphere for the development of MRO (maintenance, repair and overhaul) in the country”.
Maintenance, repair and overhaul has been a key component of the aviation industry, but most Indian aircraft still head abroad when it is time for heavy checks where the aircraft is literally stripped part by part and reassembled due to the requirement for a close inspection. Of course, this costs money and drains foreign exchange. Any positive move in this aspect will be good, but for the moment the Budget document is quiet on the details.
Indian MRO operations are taxed heavily, so the first step for the government would be to drastically slash the duty structure so it is in line with other countries worldwide.
Another buzzword included in the Budget is the intent for “India to enter into aircraft financing and leasing activities from Indian shores”. When live and active, this will be a great move because Indian airlines will pay in Indian Rupees for the lease of their aircraft, rather than in US dollars, reducing one variable cost in their accounts. Again, the document goes quiet on how this would really work out. If the finance ministry looks east where Chinese companies such as BOC Aviation have become global players in the aircraft leasing industry, it will realise it has a lofty job on its hands to create an enabling environment where Indian lessors would be able to become players in this global industry.
The Chinese lessors are supported by their government with international operations set up in Hong Kong/Ireland. This allows them to be major players on the global leasing scene aided by the tax treaty benefits of these countries. Not just that, the government provides subsidies and risk compensation to Chinese leasing companies, thus enabling them their growth.
The policy move that needs the most change and will be the most effective in the growth of aviation, however, has not been addressed in the Budget. It was the long-standing move for the government to include Aviation Turbine Fuel (ATF) in the Goods and Services Tax (GST) structure. Fuel is about 40-50 percent of an airline’s cost structure. If the airlines can’t get input credit on these costs, then that is a huge chunk of taxation money that these firms are paying.
At the end of the day, Budget 2019 sets out a wishlist of good-to-have from the perspective of being an aviation major, but it offers little in terms of concrete inputs with respect to how will we get there. And that comes from the confusion of the government of how to treat aviation in the first place, as an elitist, sin product or as an enabler for GDP growth, where more people flying would mean more business and hence more growth of economic activity.
(The writer is Mumbai-based business travel and aviation journalist and the founder of the Indian frequent-traveller website Live From A Lounge (www.livefromalounge.com.) He tweets at @LiveFromALounge)
Updated Date: Jul 06, 2019 14:41:57 IST