Trouble in peaceful skies
It is a dream for every Indian to fly, there are still looking only 2 or 2.5% of Indians that are flying every day. People in the country are eager to fly, the industry is ready to expand, but still there are losses.
Where is the problem? What is the solution?
Indian Aviation Minister, Ajit Singh has come up with a solution of allowing foreign airlines to participate up to 49 per cent in the equity of an air transport undertaking in India.
Aviation Industry in India
India is expected to be amongst the top five nations in the world in the next 10 years in the aviation sector. On the sidelines of the International Civil Aviation Negotiation (ICAN) Conference, Ms Pratibha Patil, President of India highlighted that currently, India is the 9th largest civil aviation market in the world. “Recent estimates suggest that domestic air traffic will touch 160-180 million passengers a year, in the next 10 years and the international traffic will exceed 80 million passengers a year,” added Ms Patil.
On one hand there is display of potential of the aviation sector in India but on the other hand Indian Aviation sector has been facing the worst turmoil resulting in losses of about Rs.10,000 crores for the financial year 31st March 2012. Kingfisher Airlines, one of the major airlines in India, is under heavy dues to various Authorities like The Income Tax Authority of India and Rs.278.52 crores to the Airport Authority of India (AAI). Out of the 6 major airlines operating in India, only one is making profits, that is, Indigo Airlines.
The reasons for such huge losses can be the extremely high rate of taxes levied on air tickets, rising operational costs, expensive fleet, worker’s standoff and so on. So even though Travel demand has grown but low fares have not allowed airlines to recover their cost. Spiralling cost of aviation turbine fuel (ATF), global economic slowdown and low yield due to intense competition and consequent widening gap between revenue and expenses have contributed to their problem .
SENSITIVITY AND RESTRICTIONS IN THIS SECTOR GLOBALLY
The airline industry has remained an exception globally, to the process of economic liberalization. Globally, the airline industry remains subject to several restrictions – in terms of both operations and of ownership & control. All countries impose restrictions in this one sector; restrictions that benefit national entities; and debar foreign investors generally for security reasons
As a general practice a majority of the countries – both in the developed and the developing world – have imposed a 49% ownership limit in the airline industry. This is true for Singapore, China and a host of other nations across Asia and Europe. The US, otherwise a free economy, is even more restrictive in the Airline sector. US limits the amount of foreign ownership in its domestic airlines to a maximum of 25%.
CURRENT FDI POLICY IN INDIA:
MEANING OF FDI:
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy .
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
FDI IN INDIA:
In recognition of the important role of Foreign Direct Investment(FDI) in the accelerated economic growth of the country, Government of India initiated a slew of economic and financial reforms in 1991. India is now ushering in the second generation reforms aimed at further and faster integration of Indian economy with the global economy. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all the economic activities under the automatic route.
India is the second most important FDI destination (after China) for transnational corporations during 2010–2012. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. According to Ernst and Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an increase of 25% to $50.8 billion.
FDI IN AVIATION SECTOR
Current rules do not permit foreign airlines to invest in domestic carriers, although non-aviation-related investors can hold up to a 49-percent stake.The proposal to allow foreign airlines to invest in domestic airlines is under active consideration of the Parliament.
If we trace the history of investment by foreign airlines in India we notice that politicians blocked a 1997 proposal by India’s Tata group to start an airline in association with Singapore Airlines.In his book An Outsider Everywhere—Revelations by an Insider, M.K Kaw, India’s former civil aviation secretary, underscored the significance of the government’s move. “The history of civil aviation in this country would have taken a different trajectory, if Tata-SIA had been allowed to float an airline,” he wrote.
At present the rules are as follows:
(a)Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Air Transport Services, helicopter and seaplane services.
(b)No foreign airlines would be allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled and Non-Scheduled Air Transport Services except Cargo airlines.
Scheduled air transport service means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public;
Non-Scheduled Air Transport service means any service which is not a scheduled air transport service and will include Cargo airlines.
(c)Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services.
Simply put, FDI in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline is allowed upto 49% (100% for NRIs) through automatic route. FDI in Non-Scheduled Air Transport Service is allowed upto 74% (100% for NRIs) where upto 49% is allowed through automatic route and beyond 49% and upto 74% through government approval route.
PROPOSALS IN THE UNION BUDGET 2012-13
The following were the proposals made by the Finance Minister, Pranab Mukherjee in the Union Budget in 2012-13:
1. To address the immediate financing concerns of the civil aviation sector, It was proposed to permit external commercial borrowing (ECB) for working capital requirement for the airline industry for a period of one year subject to a ceiling of $1 billion
2. A proposal for allowing foreign airlines to participate up to 49 per cent in the equity of an air transport undertaking engaged in schedule and non-schedule transport services was to be under active consideration of the Parliament.
3. For reducing the ATF (aviation turbine fuel) price burden, the government allowed the airlines to directly import jet fuel as actual end users thereby escaping the state value added tax (VAT), which ranges from 3 to 33%. This move is expected to help them reduce overall costs as ATF constitutes around 45 per cent of their operating costs
4. Recommendation for allocating Rs.4,000 crore to the cash-strapped Air India.
5. In a bid to encourage maintenance, repair and overhaul (MRO) sector, the budget proposed to allow full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment
6. As a sop to Indians travelling abroad duty-free baggage allowance, which was last revised in 2004, was raised from Rs.25,000 to Rs.35,000 and for children of up to 10 years from Rs.12,000 to Rs.15,000
Aviation analysts felt that some of the measures in Budget 2012-13 that will bring down input costs for the airline industry which has been burdened with mounting losses. When implemented, the proposals would help in making India competitive in the international maintenance and repair of aircraft
EFFECT OF ECB:
ECB is a financial instrument used by the government to facilitate the access to foreign funds by Indian corporations and public sector undertakings.
ECB, according to analysts, will not only provide an additional source of much needed capital at low cost for the airline industry but also enable them to cushion themselves against the current financial crunch. The cost of borrowing from overseas is much lower than domestic debt and nearly 60 per cent of ECBs raised in 2011-12 cost 5 per cent less than the domestic borrowings. It is felt that this is the opportune time to raise foreign loans for Indian entities as interest rates in most developed countries are lower than in India and the aviation sector should be allowed to get maximum benefit of the prevailing situation.
PROPOSAL FOR ALLOWING FDI
Currently, foreign investors not related to the aviation business are allowed to hold stakes of up to 49 per cent in Indian carriers. However, on the recommendation of the aviation minister Ajit Singh, the government feels foreign airlines should be allowed to buy stakes of up to 49 per cent in Indian ones.
The decision to allow foreign airlines such as Emirates, Lufthansa, British Airways and Etihad to invest in domestic carriers was taken to save the cash-hungry Indian aviation sector, reeling from soaring fuel costs, swelling debts, high taxes and cut-throat competition. The move would also usher in international technical know-how and global expertise .
The Indian Airline Companies are hopeful that the foreign Companies will invest in India as it is a potentially big market with18% compound annual growth , more than USA and Europe.
For customers this step will be good or not will have to be seen later . However FDI in aviation will ensure reliability , efficiency , less delaying of flights and better operations . With taxes in control , the prices are also less likely to be affected. Operational advantages will be provided to the huge market. Above all , the key to survival will be customer satisfaction .
Even the Estimates Committee of Parliament has recommended removing the cap in Foreign Direct Investment in the civil aviation sector. The committee noted that the aviation industry is “heavily burdened” with taxes and levies like sales tax on aviation turbine fuel, withholding tax on leased aircraft, high airport charges and levy of royalty, service tax on agency fees, expenses incurred abroad on loans raised and also services rendered and consumed abroad They concluded that apart from addressing the shortage of funds, this would help raise the level of services for the consumers and promote healthy competition .
In an interview, Ajay Singh, the founder of Spice Jet highlighted how the scheme of FDI will promote efficiency amongst the competitors for foreign funds in India. He explained that eventually the market will determine which airline is going to survive and which is not, even in terms of foreign investment. Foreign airlines are not just going to come in and start investing money in inefficient airlines. So, in a sense FDI will actually promote efficiency because investment will gravitate towards those airlines that are more efficient.
Foreign Investor’s Concern Regarding FDI Policy in India
“In today’s difficult environment, generally speaking, many airlines are trying to keep their balance-sheets strong rather than investing in other airlines. …. Investing in loss-making business like the Airlines in India is obviously not a winning strategy,” IATA Director General and CEO Tony Tyler told PTI in an interview. He also proposed that more aviation friendly policies are required, particularly lifting the dead weight of taxation.
A similar view is expressed by Tim Clark, President, Dubai-based Emirates, saying that the euphoria over FDI in airline has the potential of turning into a damp squib as no airline would invest in Indian carriers unless the Indian government gave ultimate control to outside investors. What is highlighted is that Indian companies only want foreign airlines’ money and not their advice. They would like to continue operating in their old way, draining shareholders money in the process. Emirates were expected to be the ‘knight in shining armour’ whom other international players would have replicated by investing in India. The airline has made it clear that this is no longer going to be the case.
Any proposal by any foreign carrier will not be put on the automatic route but will be approved on a case-to-case basis by the government. For the sake of safety the government has come up with a number of stiff riders. Each proposal will be vetted carefully before an approval is granted. The threat perception from individuals would be more than established for airlines that come forward for investment.
Even after a foreign carrier has invested in an Indian one, majority control must necessarily remain with a resident Indian. And, the board of directors of the target airline should continue to have two-thirds of its members as Indians. Besides, any such transaction for investment should fall within the SEBI guidelines. At no stage should the foreign shareholding in an airline – either by the foreign carrier, foreign institutional investors (FIIs) or through any other investment – exceed the sectoral cap of 49 %.
A Start Has Been Made
India is the 9th largest civil aviation market in the world and the recent estimates suggest that in next 10 years, domestic air traffic will touch 160-180 million passengers a year and international traffic exceed 80 million passengers. The sector, which is growing at the rate of close to 20 per cent and likely to generate about 2.6 million jobs in the next decade, needs to grow at a handsome speed to be used to its best potential.
Tony Tyler, IATA’s Director General and the CEO in his keynote address at the India Aviation 2012 conference displayed immense confidence in the Indian Aviation Industry saying, ‘I am passionate about aviation. And I am an India optimist. The IATA (International Air Transport Association) will be fully engaged in the team effort to turn Indian aviation into the great success story that it has the potential to become. India should not settle for a bronze medal in the world of aviation. It has pure gold potential,’ .
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