The Indian aviation sector, once characterized by its promise and potential, now stands at a pivotal moment in its trajectory. Despite the disruptions caused by the COVID-19 pandemic, the domestic passenger air traffic has not only rebounded but has already surpassed pre-pandemic levels, indicating the resilience and adaptability of the industry. Projections paint a picture of exponential growth, with India’s commercial aviation market poised to become one of the world’s top three by 2041. The fleet size is expected to nearly quadruple since 2019, with South Asia welcoming over 2,700 new airplanes in the next two decades, 90 percent of which are destined for India according to the Boeing Commercial Market Outlook 2023.
Challenges
Fuel Taxation
One of the most pressing challenges facing the Indian aviation industry is the high taxation on Aviation Turbine Fuel (ATF). In India, ATF accounts for a substantial portion of airline operating costs, sometimes reaching as high as 40-45 percent. This is in stark contrast to global counterparts where fuel costs typically range from 20-30 percent of operating expenses. The burden of high taxes on ATF strains airlines’ financial viability, potentially leading to reduced margins, route closures, and fare hikes. Such impediments can hinder the sector’s growth and dampen its potential to contribute significantly to the economy.
Financing and the Cape Town Convention
The absence of India’s ratification of the Cape Town Convention poses challenges for aircraft financing. The Convention provides creditors with priority in case of airline insolvency, thereby reducing leasing rates and encouraging investment. Without this ratified treaty, creditors lack security, resulting in higher leasing rates for Indian airlines. This hampers their ability to expand their fleets and compete effectively in the global market. Clear timelines for the ratification process are essential to instill confidence in the leasing environment and attract investment.
MRO Capabilities
India’s maintenance, repair, and overhaul (MRO) capabilities are another area of concern. While the country handles line and hangar maintenance, over 80 percent of MRO expenditure goes abroad, primarily for component and engine maintenance. Insufficient infrastructure and expertise in critical areas like component and engine MRO pose challenges to ensuring aircraft safety, reliability, and efficiency. Developing robust MRO capabilities is imperative not only for the industry’s growth but also for job creation and technological advancement.
Pathways to Sustainable Growth
Taxation Reforms
Reforming taxation policies on ATF is essential to alleviate the financial burden on airlines. Bringing ATF under the Goods and Services Tax (GST) regime at an optimal rate can help reduce operating costs and stimulate passenger demand. Additionally, short-term measures such as reducing excise duty and Value-Added Tax (VAT) on ATF can provide immediate relief to airlines and foster a conducive environment for growth.
Ratification of the Cape Town Convention
Prioritizing the ratification of the Cape Town Convention is critical to improving the leasing environment and attracting investment. Clear timelines and a commitment to the ratification process are necessary to instill confidence among creditors and investors. By providing creditors with security and reducing leasing rates, the ratification of the Convention can facilitate fleet expansion and enhance competitiveness.
Enhanced MRO Capabilities:
Investing in the development of MRO infrastructure and expertise is crucial for enhancing safety, reliability, and efficiency in the aviation sector. Incentivizing localization of MRO services through tax waivers, incentives, and policy support can encourage domestic investment and reduce reliance on foreign facilities. Focus should be on developing expertise in critical areas like component and engine maintenance to bolster India’s MRO capabilities and promote sustainable growth.
Policy Recommendations
Customs Duty Exemptions
Components and spares required for MRO should enjoy customs duty exemptions to enhance competitiveness and encourage domestic MRO growth. Lowering the cost of importing essential components can make Indian MRO services more attractive to airlines and foreign carriers.
GST Reforms
Zero-rated GST for MRO services and components can reduce operational costs for airlines and attract foreign carriers for MRO services in India. Providing incentives for MRO customers and ensuring seamless customs processing can further support the growth of the MRO sector.
Infrastructure Development
Investing in MRO infrastructure and expertise is essential for enhancing safety, reliability, and efficiency in the aviation sector. Production-Linked Incentives (PLIs) and tax waivers can incentivize capital investments in the MRO sector, while streamlined regulatory processes can enhance efficiency and competitiveness.
Conclusion
As India’s aviation sector charts a course towards unprecedented growth, addressing challenges and implementing strategic interventions are imperative. By reforming taxation policies, ratifying international conventions, and enhancing MRO capabilities, India can navigate towards sustainable growth in its aviation sector. A collaborative effort between the government, industry stakeholders, and regulatory bodies is essential to realizing the full potential of Indian aviation and ensuring its contribution to economic prosperity and societal development.
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