Aviation Sector - access to all

India’s aviation industry overview

The Indian aviation sector is the third biggest domestic aviation market worldwide and the ninth largest international aviation market. On the demand side, India’s passenger traffic grew at a 11% compound annual growth rate (CAGR) between FY16-20 to touch 341 million in FY20. On the other hand, 62 airports have been built between 2014 to date taking the total tally to 136 to boost airport infrastructure to cater to growing demand.

Key drivers

The fundamental drivers for aviation industry growth are growing demand from middle class, growth in population and tourism, higher disposable incomes, favourable demographics, rising aircraft penetration and aviation infrastructure growth. While the underlying drivers will continue to prevail in the future, India’s aviation sector, to become the third largest market worldwide will depend on heightened demand across the country by providing “access to all.” To achieve this and take India to new peaks, increased private sector investment coupled with increased public sector involvement will be very essential.

Government Initiatives

The Government of India has taken several steps for the growth of aviation sector in India. These include -

• Regional Connectivity Scheme – UDAN (Ude Desh Ka Aam Nagrik):
  • Launched in October 2016, the aim of this scheme was to develop new regional airports, upgrade the infrastructure of existing ones, and develop subsidized air routes.
  • To subsidize regional flights, a small levy of Rs 50 (US$ 0.6) is charged on flight tickets between major routes.
  • Cap airfare at Rs 2,500 (US$ 32.8) for a 1-hour journey of 500 km.
  • Develop 100 new airports, heliports, and water aerodromes between 2019-24, for which the airport authority of India (AAI) had set aside Rs 25,000 crores (US$ 3.3 billion).
  • Allott 780 routes to airlines.
  • The scheme detailed three types of concessions:
    • Central Government - Viability Gap Funding (VGF), provided to make air travel routes more viable for airlines.
    • State Government - reduction of Value-added Tax (VAT) to 1% or less for ten years to airports developed under the scheme, as well as providing land for airports at subsidized rates.
    • Airport Operators – waive parking, landing, and storage charges at participating airports, and no TNLC (Terminal Navigation Landing Charges).

• Union Budget Incentives:

During the Union Budget for FY 2021-22, the Ministry of Civil Aviation announced few positive measures for the aviation sector:

• Tax holiday for capital gains income of aircraft leasing and financing companies, and tax exemptions for aircraft lease rentals or royalties paid to a foreign lessor.
• Custom duty was reduced from 2.5% to 0% on aviation sector components, including engines, for aircraft manufacturing done by PSUs of the Ministry of Defence. This will decrease the input cost for domestic manufacturers.

• GST:

In March 2020, the GST rate for manufacturing, repair and operations (MRO) for services provided locally was reduced from 18% to 5%, and the place of supply for B2B MRO services was changed to the location of the recipient. This would help invite foreign investment in the aviation sector and generate meaningful employment.

• FDI:

FDI is a huge driver of economic growth and a good source of non-debt financing for the country's economic development. In the aviation sector, FDI helps in setting-up new airports, and improving the infrastructure and services of existing airports. It encourages competition, helps lower the prices and provides the consumer with more choice. According to leading national credit agency CRISIL, FDI of up to US$ 6 billion is expected to flow into the Indian airport infrastructure by FY23.

• New Airports:

To increase the nationwide connectivity via the construction of new airports, the Ministry of Civil Aviation approved plans to set up 21 greenfield airports in India over the next four years. Besides that, there are more than 40 new airport projects currently under development at various stages in India with the most notable ones being –

Private sector investments:

To ensure accessibility, inclusivity and affordability, increased private sector contribution will also be required through Public-Private Partnership (PPP). As per Mr. Rajiv Bansal, Civil Aviation Secretary, investments to the tune of Rs 90,000 crore (US$ 12 billion) will be made over a five-year period starting FY21 for airports. Of this amount, Rs 68,000 crore (US$ 9 billion) will come from the private sector and Rs 20,000-22,000 (US$ 2.6-2.9 billion) will be invested by the Airports Authority of India (AAI). Furthermore, for the first time in two decades, two new airlines will start operations in 2022 -

• Akasa is backed by billionaire investor Mr. Rakesh Jhunjhunwala and is looking to breach the ultra-low-cost carrier (ULCC) segment.
• Jet Airways 2.0 will begin operations in early 2022 with the plan to start services from metro cities, and gradually expand into tier 2 and tier 3 cities.

Aviation Industry Outlook:

The Ministry of Civil Aviation unveiled the Vision 2040 document in January 2019, which highlighted the growth potential among the different sectors within the aviation industry in India, as well as the steps that need to be taken to reach the desired objective. As per the document, passenger traffic is poised to hit 1.1 billion people by FY40 and to satisfy this demand, India will aim to have 190 - 200 functional airports by 2040. If these targets are indeed achieved, then it can be reasonably concluded that India has made serious progress in making air travel accessible to all.