The usually-ignored aviation sector found considerable mention in the Budget speech. Air India will be put on the block again, FDI in aviation could be opened up further, and the government will take steps to catalyse the growth of aircraft financing and leasing, and the MRO (Maintenance, Repair and Overhaul) industry in India. These are welcome announcements and if implemented well, could give a boost to the struggling sector.
Air India, propped up with taxpayer money, is arguably the mother of market distortions in Indian aviation. Also, the high cost structure faced by Indian carriers is compounded by the lack of adequate support infrastructure — this results in big forex outgo for airlines. But the Budget speech, while being high on intent, was low on specifics. It did not lay out, for instance, the change in strategy that would enable the strategic disinvestment of Air India, after the botched attempt last year. Onerous terms such as the Centre retaining a minority stake and restrictions on restructuring post-acquisition are said to have put off potential bidders the last time around. The Centre should now commit to a clean exit from Air India with full flexibility to possible acquirers. In this context, allowing foreign airlines to hold up to 100 per cent (49 per cent currently) in Indian carriers including Air India will help. Along with this, the rule on substantial ownership and effective control (SOEC) — that requires most of an Indian carrier’s top management to be Indian — needs to be relaxed. Establishing an aviation financing and leasing ecosystem in India is imperative. India is among the fastest growing aviation markets in the world and Indian carriers are on a fleet expansion spree, much of it through the operating lease model. But as a KPMG-FICCI report points out, Indian carriers are almost entirely dependent on foreign lessors that are based abroad, particularly Ireland — this results in big forex outgo and increase in costs.
It makes economic sense to provide tax incentives and an enabling regulatory environment, including effective repossession laws, to build an aircraft financing and leasing industry in the country. India can take cues from China which has successfully kick-started its own industry with the help of tax breaks and subsidies. Similarly, lower taxes are the need of the hour to give a leg-up to the MRO industry in the country. With an 18 per cent GST levy, Indian MRO providers are not in a position to compete, and Indian carriers take more than 90 per cent of their business to rivals in neighbouring countries such as Sri Lanka and Singapore. There is a clear opportunity to seize the initiative back with moderate taxes. This will also give a fillip to high-end jobs in the country and aid the Make-in-India push. The Centre would do well to promptly spell out the specifics of its aviation proposals.