India’s aviation industry is at a crossroads – still facing roadblocks with respect to infrastructure, operational inefficiencies, and an increase in cost. A strategic impetus to the industry is required in the upcoming Budget 2025, given increasing demands and growing passenger numbers. Of late, reports by ICRA have also indicated an enormous amount of losses airlines would have to face over the next couple of years with the net losses amounting between Rs 2,000-3,000 crores on account of supply chain, engine, and other contemporary hiccups in the system. The budget 2025 would then focus upon the reformation process concerning all these and thereby create space for growth for several years to come.
Problems in the India’s Aviation Sector: Obstacles
The potential that India has in its aviation sector is much greater, but its progress is marred by a number of critical issues. Starting from deplorable infrastructure to dependence on international services, the number of operational airports in existence today in India is far below the national requirement. The Indian population is 1.4 billion, and there are 149 airports; these airports are not only fewer but also archaic and outdated and cannot be capable of coping up with the increased need. There is an average number of 94 lakh people to each airport which increases congestion, delay, and low operational capacity.
The other is the Ude Desh Ka Aam Naagrik or UDAN scheme that was announced with the hope of boosting connectivity at the regional level. Again, this failed to take off for the lack of funds and available infrastructure. It has reduced its funding from Rs 850 crores to Rs 502 crore. This would add more blow to the schemes regarding regional connectivity. Most Tier 2 and Tier 3 cities are not served by operational airports.
Infrastructure Upgrades: A Critical Need
The only way for the Indian aviation industry to reach orbit is to upgrade the infrastructural support structure of its airports. In simple terms, increase the capacity of terminals, up-grade archaic runways, and make all-new, world-class air traffic control facilities an imperative. Much of government funding must go towards improving the efficiency of these facilities, creating a much-improved experience for the flying passenger.
Kinjal Shah, Senior Vice President at ICRA, feels the Budget 2025 should put a focus on new airport capacities and expansion of existing capacities to overcome current capacity constraints and further enhance connectivity for under-served areas. Inter-modal connectivity between airports and public transport systems also requires enhancement for easier transfer of passengers and better mode interlinking.
This will further integrate advanced technology such as automated air traffic management systems and expanding Digi-Yatra, India’s electronic passenger identification, that will speed up operations with an enhanced end-to-end passenger experience.
Domestic Production: The Potential of Make in India
The most glaring area where Budget 2025 needs to improve is the non-existence of a strong local manufacturing industry in aviation. “Make in India” has, so far, been more of electronics and garments; civil aviation still remains in an underdeveloped state. As the country experiences an ever-growing demand for services and aircraft in aviation, it is sad to note that manufacturing of parts and ground support equipment still remains very local.
This has translated into India sourcing the most expensive parts and services from international vendors. There is no domestic Maintenance, Repair, and Overhaul (MRO) industry. India has 1% market share of MRO in the world. Today, 90% of India’s MRO requirement is sourced overseas.
Introduction of a PLI scheme especially for the aviation sector could also be helpful in enhancing domestic manufacturing. Creating PPPs would also help in scaling the MRO sector that will reduce the dependency on international services and improve efficiency of operational capabilities. According to Vineet Agarwal, Transport Corporation of India’s Managing Director, this will save billions of dollars in foreign exchange and provide thousands of jobs in the long run.
GST on ATF: A Much-Needed Reform
The industry also wants ATF to be included in GST. ATF prices form 40-50% of the airline’s cost of operations. Thus, to a large extent, these prices can be determined for air fares. The component is already taxed under VAT. However, it is done so by different rates of tax applied by various states. Ranging from 1% to 30%, it introduces distortion in price and pushes the cost structure for the airlines higher.
The GST system would rationalize the tax structure of the ATF, bringing cost efficiency and price stability to airlines. This would, in turn, help operators as well as passengers by reducing ticket prices and making the sector more financially sustainable.
Conclusion: Budget 2025 as a Turning Point
This is the right time for the aviation sector, and Budget 2025 is the golden opportunity to remove all the persistent barriers that have so far prevented the sector from moving on to higher levels of growth. Infrastructure investments, encouraging domestic manufacturing, and other fiscal reforms such as GST on ATF would prepare the aviation sector well to handle future demands arising out of a rapidly growing economy.
Towards this end of India’s vision to become the world’s first global aviation hub, the Budget to be presented today is strategic in those areas so that long-term growth improves the passenger experience while reducing operational costs. Let’s hope the 2025 Budget takes all these steps to put India’s aviation sector on higher pedestals for the action time to be right now.
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For more updates on the latest developments in the Aviation sector, check out our article on Act East Policy: Northeast India Reaps the Fruits, boost air connectivity