indian economy current affairs 2017 regional connectivity ... - NEOIAS

INDIAN ECONOMY CURRENT AFFAIRS 2017 REGIONAL CONNECTIVITY SCHEME (UDAN – UDE DESH KA AAM NAGARIK) BACKGROUND India has the potential to be among the global top three nations in terms of domestic and international passenger traffic. It has an ideal geographical location between the eastern and western hemisphere, a strong middle class of about 30 crore Indians and a rapidly growing economy. Despite these advantages, the Indian aviation sector has not achieved the position it should have and at present it is ranked 10th in the world in terms of number of Passengers. India is now one of the largest domestic aviation market. Over the next half-a-decade, the sector is expected to clock a growth rate of 10 per cent a year, well over the GDP growth rate. But this remarkable surge masks a highly skewed development. Only 75 of the 476 airstrips in the country have scheduled operations while the principal hubs of Delhi and Mumbai are already stretched to capacity. Per capita availability of seats is a quarter that of Thailand or Indonesia. Despite rising fleet strength, key activities such as maintenance, repair and overhaul (MRO) take place largely overseas. And worryingly, India’s overall aviation safety rating was lowered due to a critical shortage of flight control personnel and safety inspectors, and rising number of near misses. • Potential of aviation sector in India – Ideal Geographical location and strong middle-class population • Only 75 of the 476 airstrips in the country have scheduled operations • The principal hubs of Delhi and Mumbai are already stretched to capacity • Low Per capita availability of seats • Maintenance, Repair and Overhaul (MRO) takes place largely overseas • Low overall aviation safety rating

REGIONAL CONNECTIVITY SCHEME (UDAN – Ude Desh ka Aam Nagarik) Regional Air Connectivity Scheme (RCS), presented by the Ministry of Civil Aviation, refers to operation of an air transport service between any two airports, of which at least one has been declared by the central government as unserved or underserved. An un-served airport is one to which there is no daily service, while an underserved airport is one which has not seen a flight for two consecutive flight schedules. It is considered as a vital component of the National Civil Aviation Policy (NCAP) which was released on June 2016. Once the scheme is implemented, passengers will be able to fly an hour’s journey (of about 500 km) for an all-inclusive fare of Rs 2,500. The passenger service fee and user development fee will not be applicable on this fare. Only routes covering a distance of 200-800 km connecting an ‘unserved or underserved’ airport will qualify for the regional connectivity scheme and the airfare cap will be proportional to the air NEO IAS 0484-3190310, 9446331522, 9446334122 www.neoias.com | www.youtube.com/neoias |

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distance travelled. Subsidy will be provided to airlines to fund their losses to enable them to offer airfares at Rs. 2,500. These airlines, which can bid for routes of their choice, will be given exclusive rights of a particular route for a period of three years.

OBJECTIVE OF REGIONAL CONNECTIVITY SCHEME

• To make flying affordable for the masses, • To promote tourism, increase employment and promote balanced regional growth. • It intends to revive un-served and under-served airports. IMPLEMENTATION OF UDAN Revival of un-served or under-served airports/ routes. i) Concessions by different stakeholders - Concessions by Central & State Governments and airport operators to reduce the cost of airline operations on regional routes. ii) Viability Gap Funding (VGF) for operators under RCS - Financial support to meet the gap, if any, between the cost of airline operations and expected revenues on such routes. SUBSIDY While the Centre will provide 80 per cent subsidy to airlines for three years to fund the losses they incur, to enable them to charge lower airfares to passengers, the remaining 20 per cent will come from the states. The Central Government will support the RCS Scheme by levying an excise duty of only 2% on Aviation Turbine Fuel (ATF) purchased at RCS Airports for a period of three years. The service tax will be levied at only 10% of the taxable value of tickets for RCS seats for a period of one year. The operating Airline will be free to enter into code sharing arrangement with domestic and international airlines. Further, Centre will set up a Regional Connectivity Fund (RCF) for viability gap funding, to be financed by a cess charged to airlines flying on metro or trunk routes for each departure. The cess may marginally increase airfares on such routes. The government may provide higher subsidy to the airlines if the cost of Aviation Turbine Fuel (ATF) goes up in future. The airlines will be mandated to fly at least three flights every week on such regional routes and the subsidy will be provided for maximum seven flights per week. RCS will be made operational only in those States which reduce VAT on Aviation Turbine Fuel (ATF) at these airports to 1% or less for a period of 10 years. State Government will provide land free of cost and free from all encumbrances and also provide multi-modal hinterland connectivity (road, rail, metro, waterways, etc) as required. Further, State Government will provide police and fire services free of cost. Power, water and other utilities will be provided at substantially concessional rates. Moreover, there will be no airport charges levied for operations under RCS.

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CONCERNS • The success of the scheme requires Centre-State cooperation. • The issue of providing air traffic control services • Complexities in calculating VGF • With volatile jet fuel prices, it can create additional subsidy burden • Politicization of identifying destinations with populist gestures to the hinterland voter. • Infrastructural deficits The only way to get airlines to fly these thin routes (RCS routes) would be by reducing operational costs. Thus, at the heart of RCS lies the importance of Centre-State cooperation, in the form of viability gap funding, subsidised aviation fuel and a fare cap, pivotal to enabling the scheme’s success. The States would have to be prepared to take some toll by providing free land and operational infrastructure, and that the Centre would have to agree to forego excise on aviation fuel and service tax on tickets signals that the scheme may end up testing the actual commitment of governments both at the Union and State levels. With private airlines having evinced interest but not having expressly committed themselves so far to the RCS, there is also the issue, going by experience, of whether the burden of operating such routes could end up ultimately falling on Air India. Given the scale of the scheme, there is also the issue of providing air traffic control services. With mounting worries over air safety and the alarming rise in ‘near-miss’ incidents, there can be no room for compromise on this vital component of the aviation industry.

The policy on regional air connectivity is a complex web of price controls, crosssubsidy and viability gap funding (VGF) by the government: the kind of things a NEO IAS 0484-3190310, 9446331522, 9446334122 www.neoias.com | www.youtube.com/neoias |


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regime that believes in "minimum government and maximum governance" should have nothing to do with. The scheme talks of a tariff cap, which will be linked to the distance covered. If the airline loses money on these flights, it will be compensated from RCF (cess levied from trunk routes), which can increase airfares and affect aviation market in India. Further, calculating VGF is not going to be easy, especially when jet fuel prices turn volatile. Also, different aircraft have different costs of operation, which means that the subsidy will have to be calculated afresh for each flight. There are bound to spur up further controversies over inclusion of certain costs and revenues while calculating VGF. Besides, if jet fuel prices shoot up, and the demand for this subsidy comes from all quarters, it will lead to unnecessary bureaucratic interference in the business, which is avoidable if the country wants to become business-friendly. It would also result in an additional subsidy burden that the Centre as well as the states will have to bear at a time when there is need for reducing subsidies by targeting them for the needy. There is shortage of parking area at major airports which has come in the way of exploring newer routes under the RCS scheme. The success of the RCS scheme depended more on the government fixing the infrastructure issues at large airports. Amidst these concerns, RCS is a welcome move as regional air connectivity can provide required impetus to the economic growth. It has a right mix of fiscal and monetary incentive and also gives flexibility to the operator. Further, it is marketdriven and will simulate demand. Moreover, a critical reform is the de-politicisation of identifying destinations. Indeed, resources ought to be deployed based on economics rather than as populist gestures to the hinterland voter. • •

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SUGGESTIONS National Civil Aviation Policy (NCAP) should form an independent civil aviation authority. At present, the Directorate General of Civil Aviation (DGCA) takes care of both safety and economic regulation - and fails miserably at the latter as they don’t have the technical expertise or the staff to do it. Economic regulation should be separated from safety regulations through NCAP. Airports Authority of India (AAI) is another entity that needs complete transformation, yet NCAP falls short of addressing that. India’s massive airport infrastructure development plans require a strong entity to see the execution through. In this aspect there is little clarity on the way forward for the AAI or about its listing in the stock exchanges. Airlines have for long been seeking reduction of high State taxes on ATF (Aviation Turbine Fuel) which make the fuel 50-60 per cent costlier in India than in many other countries. The NCAP gives no direction on removing the negative fiscal regime on Indian airlines which includes sales tax on ATF and other taxation measures. These have not been effectively addressed.



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Air travel in the country is expanding at a fast clip. Meanwhile, data between 2011 and 2016 reveal that the number of near collisions between aircraft has sharply increased. At the heart of the increasing number of near collisions is an increasing crunch in qualified Air Traffic Control (ATC) staff. In fact, ATC is working without a quarter of its sanctioned strength currently. This in turn is due to poor pay and the stressful job profile of an air controller. NCAP fails to address this concern and bring effective reform to ATC, which functions under Airports Authority of India.

CONCLUSION

As the Indian economy grows, consumption-led growth in populated metros is expected to spill over to hinterland areas. This is also expected to be on account of factors of production (land, labour, etc.) becoming costlier in the densely populated metro cities. In this scenario, air connectivity can provide required impetus to the economic growth of such regional centres.



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