PROJECT REPORT
ON
IMPERIAL STUDY OF FDI IN AIRLINES
AND ITS IMPACT ON INDIAN ECONOMY
SUBMITTED TO
BY
IN PARTIAL FULFILLMENT OF
MASTER OF MANAGEMENT STUDIES (MMS),
UNIVERSITY OF MUMBAI
MARCH 2015
Table of CONTENTS
Chapter No.
1
1.1
1.2
1.3
1.4
1.6
1.5
1.6
2
2.1
2.2
2.2
2.3
3
3.1
.3.2
3.3
3.4
3.5
4
Title
Page NO
Declaration from student
Certificate from Guide
Acknowledgement
Executive Summary
3
4
5
6
Introduction
Background of the study
Background of the topic
Investing Across Border
Goals of IAB indicators
Evaluations and Limitations
Methodological limitations
Indian aviation industry
FDI
Regulatory environment
Taxation and subsidies
Imperial affect on economy
Gross revenue earned by aviation
Indian aviation Market
Performance of international traffic
Facts and figures
Consumers benefits
Economic Footprint
Conclusion
Bibilography
8
11
13
14
17
21
22
23
24
28
32
35
38
42
45
46
DECLARATION
I. Mr. hereby declare that this project report is the record of authentic work
carried out by me during the period from 1ST January to 31st March and has not
been submitted to any other University or Institute for the award of any degree /
diploma etc.
Signature
Date :
CERTIFICATE
This is to certify that Mr. SIDDHARTH JADHAV of Sasmira’s
Institute of Management Studies & Research has successfully completed
the project work titled Imperial Study Of FDI In Airlines And Its Impact
On Indian Economy in partial fulfillment of requirement for the
completion MMS as prescribed by the University of Mumbai.
This project report is the record of authentic work carried out by her
during the period from 1st January2015 to 31st March2015
He has worked under my guidance.
Signature
Project Guide:
Date:
ACKNOWLEDGEMENT
On the very onset of this report I would like to extend my sincere and heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation and encouragement I would not have made headway in this
project.
I am extremely thankful and pay my gratitude to my faculty Mr. Projit Dey for his valuable
guidance and support on completion of this project in it’s presently.
I extend my gratitude to Sasmira’s Institute Of Management and Research for giving me
this opportunity.
I also acknowledge with deep sense of reverence, my gratitude towards my parents and
member of my family who has always supported me morally as well as economically.
At last but not least gratitude goes to all of my friends who directly or indirectly helped me
to complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thank you.
Siddharth Jadhav
EXECUTIVE SUMMARY
Like trade, foreign direct investment (FDI) has occurred
throughout history. From the merchants of Sumer
around 2500 BCE to the East India Company in the
17 century, investors routinely entered new markets
in foreign dominions. In 1970 global FDI totaled $13.3
billion. By 2007 it was nearly 150 times higher,
peaking at $1.9 trillion The economic crisis slashed
global FDI flows by about 40% in 2009, affecting all
economies, sectors, and forms of investment.
Mergers and acquisitions in high-income economies
contracted the quickest after the 2007 subprime
mortgage crisis in the United States contributed to
banking and fiscal crises in Western Europe and
Japan. The contagion gradually spread, affecting new
investment in emerging markets and developing
economies. Developing economies fared marginally
better during the crisis. FDI in developing economies
fell 35% in 2009, compared with 41% in high-income
economies. With the global recession receding
somewhat, FDI will likely recover in the near future.
Most indicators signal that FDI will be higher in 2010
than in 2009. The recovery in FDI is good news for
economies suffering from the global economic
downturn and seeking to stimulate economic growth.
The benefits of FDI for economic development have
been well established. A global network of 80,000
multinational corporations and 800,000 foreign
affiliates has helped create millions of jobs,
transferred technology, upgraded skills, fostered
competition, and contributed to the fiscal standing of
many economies. Through capital spillovers, FDI has
encouraged the adoption of new production
technologies. Foreign companies have also
stimulated knowledge transfers by training local
workers, developing their skills, and introducing new
management practices and better organizational
arrangements. Foreign investment has also helped
break up cozy local oligopolies and cartels.
1
th
3
4
5
Opponents of FDI point out that its impacts are
often limited and in some cases detrimental the
consequences of crowding out local competition,
enclave production with limited forward and
backward linkages, and “race to the bottom” effects
often related to labor and environmental issues.
While the main social argument for FDI is that it
generates employment, job creation may be limited
and work opportunities may even decrease if local
firms are driven out of the market by increased
competition, or if acquired companies are
restructured. Critics also cite cases of severe
pollution and environmental destruction
7
Net FDI inflows: billions of U.S. dollars at current prices
and exchange rates caused by companies in the
extractive and
energy sectors. Though some of these criticisms are
warranted, evidence for such claims is often based on
narrowly-focused studies of certain industries and
economies.
While the potential drawbacks of individual investment
projects should not be underestimated, most research
and empirical evidence finds that, on balance, FDI
helps foster development in recipient economies. The
benefits of FDI are particularly amplified in economies
with good governance, well-functioning institutions,
and transparent, predicable legal environments.
9
The study has also shown what a critical asset India’s
air transport network is, to business and the wider
economy.
Connectivity between cities and markets boosts
productivity and provides a key infrastructure on
which modern globalized businesses depend. Many of
these city-pair connections are dependent on hub
airports through which to generate the traffic density
necessary to sustain them. All airlines supplying
services at Indian airports contribute to generating
these wider economic benefits.
This study has described and quantified a number of
channels through which aviation in India generates
important economic benefits for its customers and
the wider Indian economy.
INTRODUCING THE
INVESTING
ACROSS BORDERS INDICATORS
The Investing Across Borders (IAB) indicators measure
FDI regulation in 4 specific policy areas. They aim to
complement existing measures of the quality of
business environments. Quantitative data and
benchmarking can be useful in stimulating policy
debate and action, both by exposing potential
challenges and by identifying where policy makers
might look for lessons and good practices. Indicators
can also provide a basis for analyzing how different
policy approaches—and different policy reforms—
contribute to broader desired outcomes such as FDI,
competitiveness, and growth. The following examples
illustrate how the areas of regulation measured by
IAB can be reflected in foreign investors’ decisionmaking. A company seeking to expand its global
presence will assess its options before deciding on a
location for its investment. One of the first
determinants of location is whether the company is
allowed to enter and operate in a specific market.
Though most economies have liberalized and opened
most sectors to foreign investment, some industries
continue to be protected from foreign competition.
IAB’s Investing across Sectors indicators find that
while primary and manufacturing sectors are mostly
open, some industries — such as media,
transportation, energy, and telecommunications—
remain restricted in many economies. Some of the
more restrictive economies include large ones such as
China, Mexico, the Philippines, and Thailand.
Even if a foreign company can enter a particular sector,
it may face other barriers to market access and
operations. Onerous start-up procedures, excessive
licensing and permit requirements, and timeconsuming export and import processes are among
the factors that can make an economy less attractive
to foreign investors. IAB”s Starting a Foreign
Business indicators show that in some economies
foreign companies must complete lengthy procedures
to obtain investment approvals, adding weeks and
sometimes months to the start-up time. In other
economies the procedures can be done online and
take only a few days. Once a foreign company has
been established in a new market, it is likely to need
to acquire real estate for its operations.
Administrative barriers to FDI often include
difficulties associated with securing access to land.
The ability to access land or buildings with secure
ownership rights, at transparent prices, and with
limited restrictions can be critical to a foreign
investor’s decision on whether to invest in a new
market. IAB’s Accessing Industrial Land indicators
find that foreign companies cannot own land in some
economies.
In others, leasing land can take up to 5 months. And
while most economies have both cadastre and land
registry systems, less than half of those in the IAB
sample have systems for sharing land-related data
across agencies. A foreign company might also be
concerned about its ability to resolve disputes with
commercial partners.
Complex commercial contracts require reliable and
flexible dispute resolution mechanisms, and
companies often prefer to have alternatives to court
litigation. Investors favor environments where they
have flexibility in deciding on arbitration proceedings
and where outcomes are more secure and easily
enforceable.
Thus a stable and predictable arbitration regime, as
part of the broader legal framework, is another factor
that can affect conditions for FDI. IAB’s Arbitrating
Commercial Disputes indicators show that economies
generally recognize arbitration as a mechanism for
resolving commercial disputes, although some do not
have special arbitration laws.
Party autonomy levels and enforcement mechanisms for
arbitration awards vary. For example, some
economies have adopted rules to ensure prompt
enforcement of arbitration awards. In contrast, in
other economies it takes more than 2 years to
enforce a final arbitration award. The IAB indicators
comprise measures of the characteristics of laws and
regulations (de jure indicators), and their
implementation (de facto indicators). IAB’s Web site
provides open access to these indicators Below are
overviews of the 4 indicator topics:
Investing Across Sectors indicators measure the degree
to which domestic laws allow foreign companies to
establish or acquire local firms. The indicators track
restrictions on foreign equity ownership in 33
sectors, aggregated into 11 sector groups, including
primary, manufacturing, and service sectors.
Starting a Foreign Business indicators record the time,
procedures, and regulations involved in establishing
a local subsidiary of a foreign company in the form of
a limited liability company.
Accessing Industrial Land indicators evaluate legal
options for foreign companies seeking to lease or buy
land in a host economy, the availability of
information about land plots, and the steps involved
in leasing land.
Arbitrating Commercial Disputes indicators assess the
strength of legal frameworks for alternative dispute
resolution, rules for arbitration, and the extent to
which the judiciary supports and facilitates
arbitration. The indicators compare national regimes
for domestic and international arbitration for local
and foreign companies. The indicators are structured
to reward good regulation and efficient processes.
Transparent, predictable, and effective laws and
regulations are critical to ensuring that foreign
investment results in a win-win situation for
investors, host countries, and their citizens. A solid,
consistently applied legal framework gives investors
confidence in the security of their property,
investments, and rights.
The IAB project does not advocate for reducing all
regulatory barriers, but hopes to improve
understanding of how to maximize the development
benefits of FDI through IAB
They are based on standardized questionnaires,
allowing for straightforward international
comparisons of results, providing examples of good
practices, and encouraging exchanges of information
between economies.
? GOALS OF THE IAB INDICATORS
The World Bank Groups Doing Business project provides
the methodological foundation for the IAB
indicators. The Doing Business indicators compare
regulation of domestically owned small and medium
enterprises.
12
Those indicators have helped stimulate hundreds of
reforms worldwide and draw millions of visitors to
their online database every year. Many users of
Doing Business data—including governments,
policymakers, academics, and other stakeholders—
have expressed interest in complementary indicators
on regulation of foreign-owned companies. The IAB
indicators aspire to meet different stakeholders’
needs for information, analysis, and policy action .
Foreign investors and governments concerned about
the competitiveness of their economy’s business
environment have a broad range of resources at their
disposal. some widely used international indicators
and assessments of investment climates.
IAB does not provide a complete picture of economies’
investment climates and should be used in
conjunction with other tools to analyze business
environments, diagnose their strengths and
weaknesses, and, if appropriate, guide reforms. IAB’s
value is based on its ability to identify specific,
actionable, and practical steps that governments can
take to increase domestic investment
competitiveness in the policy and regulatory areas
measured by the IAB indicators. The following
features differentiate IAB from other data sources:
? Actionable, reform-oriented indicators.
The IAB indicators identify specific impediments to FDI
in the legal, regulatory, administrative, and
institutional frameworks of each economy covered.
The indicators are reform-oriented because the
identified problems can be addressed in the short
and medium term to strengthen an economy’s
investment climate.
?
? Local
expertise
The IAB indicators are based on information
collected from more than 2,350 local experts
and practitioners representing leading law and
accounting firms, chambers of commerce, and
investment promotion institutions. These
experts bring a wealth of knowledge based on
their experiences advising foreign investors on
market entry and operations in their economies.
? Focus on laws and their implementation
The IAB indicators evaluate the scope and strength of
laws and regulations as well as, where possible, their
implementation. Many economies have adopted
modern laws and rules, but these are often not
applied effectively. The combined measures of de jure
and de facto performance provide a more
comprehensive, realistic picture of business
conditions.
The IAB report will become a regular publication
measuring changes in FDI regulation worldwide.
Similar initiatives have shown the power of regularly
updated indicators to stimulate dialogue and actions
that can lead to systemic, long-term reforms. IAB’s
ability to capture and recognize these improvements
on a regular basis gives political actors compelling
tools for engaging in strategic communication and for
initiating or sustaining reform momentum.
? EVOLUTION AND LIMITATIONS OF THE IAB
INDICATORS
The IAB indicators have limited thematic coverage. The
4 topics covered by this report were chosen from a
wide range of policy variables that affect investment
climates and influence investment decisions. These
include the host economy’s market size and location,
availability of natural resources, macroeconomic
performance, infrastructure quality, labor and
production costs, and quality of governance and
institutions.13 Many competitive factors (such as
market size ,location, and natural resource
availability) cannot easily be influenced by public
policy. Furthermore, other policy-level drivers of FDI
(such as macroeconomic performance, infrastructure
quality, and human capital) can only be influenced in
the medium to long run. In contrast, most of the
areas of business and FDI regulation measured by
IAB can be affected in the short run and at
comparatively low cost to governments, providing an
excellent opportunity for near-term benefits. In its
conceptual and developmental phases (2006–08) the
IAB project considered and tested indicators
measuring policy areas such as employment of
expatriate workers and managers, investment
incentives and promotion, currency convertibility and
repatriation, expropriation, breach of contract, public
procurement, environmental and social regulation,
and intellectual property. The team ultimately
decided on the more modest thematic coverage of
the 4 topics presented in this report based on what
was desirable, feasible, and practical. IAB favored
topics that could be affected by public policy in the
short term and information that could be captured
through surveys of local experts. It aimed for
indicators that assess the treatment of a typical
foreign investor and offer enough variation across
economies to warrant the development of global
indicator set. While legal and regulatory frameworks
for FDI are typically not the primary drivers of
investment decision, all other conditions being equal,
they can tip an investment decision in favor of a
particular economy. Strong, stable legal and
regulatory frameworks help create a more
transparent, predictable business environment
conducive to business and investment.
? Substantive limitations
?? IAB
focuses on regulation of FDI, not portfolio
investment.
14
?? Thematic
coverage is limited to 4 discrete policy
areas.
?? IAB
focuses on national laws and, in some cases, on
countries’ ratifications of international conventions.
It does not focus on international investment
agreements.
?? The
project does not cover legal regimes for special
economic zones (SEZs), export processing zones
(EPZs), and other areas governed by special legal
frameworks designed to promote FDI and exports.
? Methodological limitations
?? IAB
is not a survey of investor or company
perceptions.
?? IAB
data are not based on a statistically significant
sample of respondents in each economy.
?? The
IAB indicators are not necessarily representative
of all investment projects.
?? Data
on the efficiency of administrative processes
refer to each economy’s largest business city only.
?? For
these data, the methodology assumes that an
investor and its legal counsel have full information on
what is required and that they do not waste time
when completing procedures.
?? The
IAB indicators are not specifically designed to
indicate whether treatment of foreign investors is
more or less favorable than that of domestic
enterprises.
?
Limits to interpretation and use
?? The
IAB indicators do not examine whether more
regulation is preferable to less. They focus on good
regulation.
?? IAB
data should not be used as a proxy for
government reforms in general, and governments
should not assume that improvements in the
indicator scores will increase FDI. Due to these and
other limitations, the IAB indicators are only partial
measures of the topics they cover. They are limited in
scope and explanatory power when it comes to actual
policies and business realities. Circumstances in each
economy must be considered when interpreting the
indicators and their implications for policies and the
investment climate.
Investing Across Borders is a new initiative that the IAB
team aims to continue to improve in the future. Over
time the team hopes to increase the number of
economies surveyed, introduce rankings and other
direct comparisons for each topic measured, and
engage a growing number of questionnaire
respondents. Though there are currently no plans to
expand the report’s thematic coverage to other areas
of FDI regulation, this option will be considered if
there is specific and sufficient demand from
governments or other stakeholders to carry out the
additional research. The IAB team also intends to
leverage the report’s findings in the research,
analysis, and reform advisory work of the World Bank
Group and its partners. Any parties interested in
collaborating on any of these areas are welcome to
contact the IAB team. The team would also be
grateful for feedback on the data, methodology, and
overall project design that would make IAB a better,
more useful resource for its users. Investing Across
Borders 2010 (IAB) presents cross country indicators
analyzing laws, regulations, and practices affecting
foreign direct investment (FDI) in 87 economies. The
indicators focus on 4 thematic areas measuring how
foreign companies invest across sectors, start local
businesses, access industrial land, and arbitrate
commercial disputes. The indicators combine
analysis of laws and regulations, as well as their
implementation. They explore differences across
countries to identify good practices, facilitate
learning opportunities, stimulate reforms, and
provide cross-country data for research and analysis.
The project’s methodology is based on the World
Bank Group’s Doing Business initiative. The IAB
indicators draw on data collected through a survey of
lawyers, other professional service providers (mainly
accounting and consulting firms), investment
promotion institutions, chambers of commerce, and
other expert respondents in each of the countries
measured. Between April and December 2009 more
1
than 2,350 experts in 87 economies responded to the
survey to provide data for this report.
This chapter presents the report’s main findings
including examples of FDI competitiveness-enhancing
practices for each indicator area. It also provides key
results for each region. IAB does not measure all
aspects of the business environment that matter to
investors. For example, it does not measure security,
macroeconomic stability, market size and potential,
corruption, skill levels, or infrastructure quality. Still
the indicators provide a starting point for
governments seeking to improve their
competitiveness in attracting foreign investment.
Restrictive and obsolete laws and regulations impede
the proceeding of regulation in the aviation industry
Most of the 87 economies measured by IAB have FDIspecific restrictions that hinder foreign investment..
While there are few restrictions on foreign ownership
in the primary sectors and manufacturing, services—
such as media, transportation, and electricity—have
stricter limits on foreign participation
In some sectors—such as banking, insurance, and media
—laws often limit the share of foreign equity
ownership allowed in enterprises. In others—such as
transportation and electricity—state-owned
monopolies preclude both foreign and domestic
private firms from engaging in the sectors.
When it comes to international commercial arbitration,
nearly 10% of IAB countries do not have special
statutes for commercial arbitration.
Furthermore, 1 in 4 countries has not ratified the New
York Convention, the ICSID Convention, or both.2
Adherence to and implementation of international
and regional conventions on arbitration signal a
government’s commitment to the rule of law and its
investment treaty obligations, which reassures
investors. Red tape and poor implementation of laws
create further barriers to FDI The IAB indicators go
beyond analyzing the text of laws and the ratification
of international conventions. They also examine the
typical experience of investors as they go through
administrative processes and interact with public
institutions. For instance, the indicators find that
leasing privately held industrial land takes, on
average, 2 months—and leasing public land almost 5
months But there is also large variation across
countries. Leasing private industrial land in
Nicaragua and Sierra Leone typically requires half a
year, as opposed to less than 2 weeks in Armenia, the
Republic of Korea, and Sudan. The amount of time
required to enforce an arbitration award in local
courts also varies by country. On average, more than
a year is needed in the South Asian economies
measured by IAB.
? Good regulations and efficient processes matter for
FDI
Countries with poor regulations and inefficient
processes for foreign companies receive less FDI and
have smaller accumulated stocks of FDI (figure 2.6).
Based on IAB results, countries tend to attract more
FDI if they allow foreign ownership of companies in a
variety of sectors, make start-up, land acquisition,
and commercial arbitration procedures efficient and
transparent, and have strong laws protecting
investor interests. But this correlation does not imply
existence or direction of a causal relationship. Many
other variables—such as market size, political
stability, infrastructure quality, or level of economic
development—are likely to better explain the
relationship. IAB also finds that countries with
smaller populations and markets tend to have fewer
restrictions on FDI. And countries that have done
particularly well in attracting FDI (before the recent
economic crisis)— such as Ireland, Singapore, the
United Kingdom, and the United States—also score
well
? INDIAN AVIATION INDUSTRY
Through turbulent times, FDI relaxation alone not a
game changer The Indian Aviation Industry has
been going through a turbulent phase over the past
several years facing multiple headwinds – high oil
prices and limited pricing power contributed by
industry wide over capacity and periods of subdued
demand growth. Over the near term the challenges
facing the airline operators are related to high debt
burden and liquidity constraints - most operators
need significant equity infusion to effect a
meaningful improvement in balance sheet.
Improved financial profile would also allow these
players to focus on steps to improve long term
viability and brand building through differentiated
customer service. Over the long term the operators
need to focus on improving cost structure, through
rationalization at all levels including mix of fleet
and routes, aimed at cost efficiency. At the industry
level, long term viability also requires return of
pricing power through better alignment of capacity
to the underlying demand growth. While in the
beginning of 2008-09, the sector was impacted by
sharp rise in crude oil prices, it was the decline in
passenger traffic growth which led to severe
underperformance during H2, 2008-09 to H1 200910. The operating environment improved for a brief
period in 2010-11 on back of recovery in passenger
traffic, industry-wide capacity discipline and
relatively stable fuel prices. However, elevated fuel
prices over the last three quarters coupled with
intense competition and unfavorable foreign
exchange environment has again deteriorated the
financial performance of airlines. During this
period, while the passenger traffic growth has been
steady (averaging 14% in 9m 2011-12), intense
competition has impacted yields and forced airlines
back into losses in an inflated cost base scenario. To
address the concerns surrounding the operating
viability of Indian carriers, the Government on its
part has recently initiated a series of measures
including
(a) proposal to allow foreign carriers to make
strategic investments (up to 49% stake) in Indian
Carriers
(b) proposal to allow airlines to directly import ATF
(c) lifting the freeze on international expansions of
private airlines and
(d) financial assistance to the national carrier.
However, these steps alone may not be adequate to
address the fundamental problems affecting the
industry.
While the domestic airlines have not been able to
attract foreign investors (up to 49% FDI is allowed,
though foreign airlines are currently not allowed any
stake), foreign airlines may be interested in taking
strategic stakes due to their deeper business
understanding, longer investment horizons and
overall longer term commitment towards the global
aviation industry. Healthy passenger traffic growth
on account of favorable demographics, rising
disposable incomes and low air travel penetration
could attract long-term strategic investments in the
sector. However, in our opinion, there are two key
challenges: i) aviation economics is currently not
favorable in India resulting in weak financial
performance of airlines and ii) Internationally, too
airlines are going through period of stress which
could possibly dissuade their investment plans in
newer markets. Besides, foreign carriers already
enjoy significant market share of profitable
international routes and have wide access to Indian
market through code-sharing arrangements with
domestic players. Given these considerations, we
believe, foreign airlines are likely to be more cautious
in their investment decisions and strategies are likely
to be long drawn rather than focused on short-term
valuations. On the proposal to allow import of ATF,
we feel that the duty differential between sales tax
(averaging around 22-26% for domestic fuel uplifts)
being currently paid by airlines on domestic routes
and import duty (8.5%-10.0%) is an attractive
proposition for airlines. However the challenges in
importing, storing and transporting jet fuel will be a
considerable roadblock for airlines due to OMCs
monopoly on infrastructure at most Indian airports.
From the working capital standpoint too, airlines will
need to deploy significant amount of resources in
sourcing fuel which may not be easy given the
stretched balance sheets and tight liquidity profile of
most airlines.
Historically, the Indian aviation sector has been a
laggard relative to its growth potential due to
excessive regulations and taxations, government
ownership of airlines and resulting high cost of air
travel. However, this has changed rapidly over the
last decade with the sector showing explosive growth
supported by structural reforms, airport
modernizations, entry of private airlines, adoption of
low fare - no frills models and improvement in service
standards. Like elsewhere in the world, air travel is
been transformed into a mode of mass transportation
and is gradually shedding its elitist image.
? Strong passenger traffic growth aided by
buoyant economy, favorable
demographics, rising disposable incomes
and low penetration levels
India aviation industry promises huge growth potential
due to large and growing middle class population,
favorable demographics, rapid economic growth,
higher disposable incomes, rising aspirations of the
middle class, and overall low penetration levels (less
than 3%). The industry has grown at a 16% CAGR in
passenger traffic terms over the past decade. With
advent of LCCs and resultant decline in yields,
passenger traffic growth which averaged 13% in the
first half has increased substantially to 19% CAGR
during 2006-2011. Despite strong growth, air travel
penetration in India remains among the lowest in the
world. In fact, air travel penetration in India is less
than half of that in China where people take 0.2 trips
per person per year; indicating strong long term
growth potential. A comparative statistic in United
States, the world’s largest domestic aviation market
stands at 2 trips per person per year. We expect
passenger demand to remain stable and grow
between 12-15% in the medium term, assuming a no
major weakness in GDP growth going forward.
? However domestic airlines operate under
high cost environment; intense
competition has constrained yields;
aggressive fleet expansions have
impacted profitability and capital
structures
Despite reforms, the domestic aviation sector continues
to operate under high cost environment due to high
taxes on Aviation Turbine Fuel (ATF), high airport
charges, significant congestion at major airports,
dearth of experienced commercial pilots, inflexible
labor laws and overall higher cost of capital. While
most of these factors are not under direct control of
airline operators, the problems have compounded
due to industry-wide capacity additions, much in
excess of actual demand. Intense competitive
pressure from Low cost carriers (focusing on
maximizing load factors) and national carrier (looking
to regain lost market share) have constrained yields
from rising in-sync with the elevated cost base.
Besides, aggressive fleet expansions (LCCs have
added aircrafts mainly on long-term operating leases;
FSC’s have purchased aircrafts – debt financed, most
often backed by guarantees from the US EXIM Bank
or Europe’s ECA) to leverage upon the anticipated
robust growth and to support international
operations have significantly impacted the capital
structure and weakened the credit profile of most
domestic airlines.
? Low-cost model now dominating the
skies; viability remains to be seen
Internationally the LCC model came into existence when
the US Congress passed the Airline Deregulation Act
in 1978 easing the entry of new companies into the
business and giving them freedom to set their own
fares and choose routes (Prior to this routes and
fares were fixed by a Government Agency). This was
followed by entry of carriers like Southwest, which
pioneered the LCC concept. Majority (~60-65%) of an
airline cost are dependent on external factors, which
can’t be managed by an LCC. This includes the fuel
cost (~40%), maintenance cost (~12%) and
ownership cost (~12-15%). LCCs try to achieve a cost
advantage in other ways by avoiding the in-flight
services, operating from secondary airports, selling
tickets through the internet, higher number of seats
in the aircraft, inventory reduction through use of
similar aircraft and lower employees per aircraft.
The Indian aviation sector was exposed to intense
competition with the advent of a low-cost airline - Air
Deccan back in 2003. The success of Air Deccan
spurred the entry of other LCCs like SpiceJet, Indigo,
Go Air and subsequently low fare offerings from Jet
airways and Kingfisher airlines. As a result, the
sector which was completely dominated by fullservice airlines till a decade ago is now dominated by
low-cost airlines. However, longer term viability of
LCCs models in India remains to be seen (Kingfisher
exited the segment recently) as airport charges are
same for FSCs and LCCs in India. Besides, the fuel
costs forms a larger proportion of overall costs as
compared to international standards due to higher
central and state government levies (viability of
direct ATF imports remains to be seen due to lack of
supporting infrastructure) and high congestion at
major airports (half an hour hovering at major airport
could increase fuel costs by Rs.60,000 to Rs. 115,000
depending on aircraft, besides impacting aircraft
utilizations). These constraint can be resolved only if
there significant improvement in infrastructure such
that LCCs could operate on secondary airports.
? Aerospace – Indian Regulatory & Policy
Environment
Being a sector of strategic importance, the Indian
government has played an important role in the
development of aerospace sector. The sector was
highly regulated and controlled by the state until last
decade.
? Investment measures
The Government encourages private investment in both
the civil and defence aerospace sector with the goal
of encouraging technology transfers and achieving
indigenization. Over the last decade, there has been
substantial liberalization in the civil aviation sector;
domestic private players are now allowed in
aerospace manufacturing & R&D and 100% FDI is
allowed under automatic route for most of the
activities. The investment limits for domestic and
foreign private participation in various aerospace
activities are as below:
??Manufacturing and R&D activity is allowed 100% FDI
on automatic route in all areas, except air traffic
services.
??In defence sector, 100% domestic private investment
is allowed but only 26% FDI is permitted in the
manufacture of defence equipment, which is also
subject to licensing requirements.
??100% FDI permitted under automatic route for MRO,
flying training institutes and technical training
institutes.
??100% FDI under the automatic route is permitted in
setting up of Greenfield airport projects
??FDI up to 49% is permitted for scheduled air transport
services/domestic scheduled passenger airlines
under the automatic route. NRI investment is
permitted up to 100% under the automatic route.
However, no direct or indirect equity participation by
foreign airlines is allowed.
??For non-scheduled air transport services/nonscheduled airlines, chartered airlines and cargo
airlines, FDI up to 74%is permitted under the
automatic route. NRI investment is permitted up to
100% under the automatic route.
??FDI up to 74% and NRI investment up to 100%under
the automatic route is permitted for ground handling
services subject to regulations in the sector and
security clearances.
??FDI up to 100% is permitted under the automatic
route for helicopter services / sea plane services
requiring DGCA approval. A significant initiative of
the government has been the introduction of defence
offset policy with effect from 2008, which mandates
foreign aircraft OEMs to outsource a minimum of 30%
of defence procurement to Indian companies, in the
areas of infrastructure, technology sharing,
components or services. Players like Air India have
for instance entered into an agreement with Boeing
with a 50% offset obligation. Such policies have
provided an opportunity for Indian manufacturers to
enter the aerospace manufacturing and gain
expertise in high tech industry with its stringent
requirements for safety, quality control and
precision.
? Taxation and subsidies
The government provides various tax incentives to the
domestic and foreign manufacturers for R&D
activities and for establishments in the Special
Economic Zones, as provided in the table below.
Deductions from Income tax Accelerated depreciation
of 40% is available for airplanes & aero-engine Tax
exemptions/ Tax holidays 100% tax exemption for
airport projects for a period of 10 years R&D related
tax deduction If certain conditions are met, deduction
is available of one and one half times of scientific
research expenditure incurred by a company on in
house
? R&D facility
Royalty/ fee waiver Royalty/fees for technical services
received by a foreign company under an agreement
with Government for providing services in or outside
India in projects connected with the security of India,
is exempt, if such foreign company is notified by
Central Government in the Official Gazette Exemption
from withholding tax Exemption from payment of
withholding tax on lease rental incomes on aircrafts
and engines earned by a non-resident lessor from an
Indian company with respect to lease agreements
which have been signed prior to 31 March 2007
The tax incentives provided to the manufacturers in the
aerospace segment are not adequate to provide a
relief against the multiple levels of taxes levied, that
often renders the sector uncompetitive. For instance,
aircraft servicing activities in India are subjected to
variety of levies such as customs duties, service tax
and VAT. Further, domestic manufacturers supplying
to the defence sector are often disadvantaged
against foreign vendors as the latter often enjoys
various tax and duty exemptions for its supplies from
abroad to the Ministry of Defence. Imports by MoD
from foreign vendors do not attract customs duty and
other levies like excise duty, sales tax and VAT are
not applicable to imported products. Further services
availed by foreign vendor from India are exempt as
these are treated as export services. In contrast,
domestic suppliers are subject to various duties like
excise duty, CST, and VAT. Additionally, service tax is
applicable on input services like payment on
Technical knowhow/ engineering services.
? Focus on Research & Development
There are numerous government research institutes
and organisations in India that carry out intensive
research and development for the aerospace sector,
namely Hindustan Aeronautics Limited (HAL),
Defence Research and Development Organisation
(DRDO), National Aerospace Laboratories (NAL),
ISRO, etc. However, the progress on R&D front has
been relatively slow. Recognising the future needs of
the defence sector, the government has invited
private sector participation from domestic as well as
foreign players in research and development
activities, providing 80% funding to the projects.
? Efforts of State Governments
State Governments have also taken several initiatives
for the development of Indian aerospace sector. The
Tamil Nadu Government plans to establish an aero
park for global aerospace and aeronautics industry in
the areas of design, manufacture and maintenance of
aircrafts. The park will be similar to those in Dubai,
China and Singapore. Similarly, the Andhra Pradesh
Government has plans for two aerospace and
precision engineering Special Economic Zones (SEZs)
in the state.
? Role of Air Transport in the
Economy
Role of Air Transport
In an increasingly globalised economy, air transport is a
vital element of the country’s transport
infrastructure. The impact of civil aviation as a sector
on the general economic activity has been studied
systematically and documented for some of the
Western developed countries. By itself, the Civil
Aviation Sector contributes significantly to the
process of development by generating employment
opportunities directly and indirectly besides
facilitating enhancement of productivity and
efficiency in the movement of goods and services.
Civil Aviation is a key infrastructure sector that
facilitates the growth of business, trade and tourism,
with significant multiplier effects across the
economy.
Doubtlessly, air transport has contributed to the rapid
growth in India’s international trade in recent
decades by offering a reliable and faster mode of
transport services to move products and personnel
across long distances. Therefore, sustaining a viable
aviation industry is vital if the economy is to reap the
full benefits of the future growth in foreign trade and
investment. Industries that rely most heavily on air
transport for their international freight shipments
include high growth sectors such as pharmaceuticals,
office equipment and electronic equipment sectors
besides those that have high value to weight
products.
Thus, it has been observed that high growth sectors in
emerging markets are heavily dependent on the
services of the aviation industry. Increased air
connectivity enables manufacturing enterprises to
exploit the speed and reliability of air transport to
ship components across firms that are based in
different and distant locations thereby minimizing
the inventory cost. Countries with higher connectivity
in general are stated to be more successful at
attracting Foreign Direct Investment. Role of air
transport is crucial for the development of Tourism
industry. Tourism makes a large and growing
contribution to the Indian economy.
The Tourism Satellite Account developed for India for
the year 2002-03 confirms tourism as one of the
largest sectors in the economy. Tourism value added
accounts for 2.78 percent of the GDP in terms the
direct contribution; when indirect effects are also
accounted for, the share of tourism in the GDP is 5.83
percent.
In absolute terms, tourism related jobs are estimated to
be in the region of about 21 million. 2 Employment in
the Indian tourism industry is dependent on the
aviation industry since 90% of foreign visitors out of
5.11 Million arrived by air in the year 2009.3 Global
evidences suggest that in U.S.A.
civil aviation activity within the overall economy was
responsible for generating 12 million jobs, USD 1.3
trillion in total economic activity and 5.6 percent of
GDP in 2009.4 In UK, the contribution of aviation
sector to its GDP is said to be to the tune of £53.3
billion (3.8%) to its GDP.5 The most important
contribution aviation makes to the economy is
through its catalytic impact on the performance of
other industries and as a facilitator of their growth.
Recent research by Oxford Economics reveals that the
direct contribution of aviation sector in India to its
GDP is 0.5% for the year 2009. If the Catalytic impact
of Civil Aviation is included, the contribution to GDP
is 1.5%. Total number persons employed in Civil
Aviation sector is estimated to be 1.5 Million and if
we include the catalytic impact then it is 10 million
persons.
Globally for every $ 100 of output produced and every
100 jobs generated by air transport in the economy
trigger additional demand of approximately $325
worth of output and 610 jobs in other industries.
During the year 2010-11, air transport carried 54 Million
domestic passengers and 37 Million International
passengers besides transporting 1.7 Million Metric
tonnes of domestic and international cargo. Air
transport is crucial for the distribution of high value
to weight products and also for goods that are to be
transported speedily.
Civil Aviation sector makes a substantial contribution to
public finances. These include, the Service tax paid
by air passengers, corporation tax paid by airline
companies, airport operators and other ground
support service enterprises,
MRO firms and income tax paid by their respective
employees, besides the revenue collected through
taxes on fuel and equipments.
Thus, the economic foot-print of the Civil Aviation
sector which reflects the value addition and the
direct and indirect employment created by activities
of the sector appear to be much deeper and wider in
terms of its multiplier effect.
? Snapshot of the Indian Civil Aviation Sector
The size of a particular industry in a given year is
assessed by the total income generated by
enterprises in that industry and the employment
generated by the said industry.
These are generally reckoned to be the key parameters
to evaluate the relative importance of a sector in an
economy. It is with this objective, an attempt has
been made to estimate the size of the civil aviation
sector in India based on available information is
evident that scheduled airlines in India contribute to
over 50% of the gross income of the Civil Aviation
sector in India.
While income of the scheduled carriers operating in
India does include income from their global
operations, income of the international airlines
having operations in India is not part of the income
shown under scheduled air lines, which according to
industry sources would be in the region of about
Rs.20,000 crores for 2010-11. If this is taken into
account then the size of airline industry alone would
exceed Rs.60,000 crores.
Estimated Gross
revenue earned
by sub-sectors
of Indian Civil
Aviation sector
Sub-Sectors
Gross income (Rs.
Crores)
Airlines
Scheduled
43,352
Non-Scheduled
1,528
Total
44,880
Airports
AAI
5,734
Private
3,805
Total
9,539
Maintenance
Repair and
Overhaul (MRO)
4,000
Air cargo and
Express
Industry
19,000
Ground handling
2,000
Aviation
Academies
325
Total
79,744
? Indian Aviation Market
? Performance of Scheduled Passenger Traffic in India
In the last two decades, the fastest growth in overall air
traffic in India was witnessed during 2004-05 to 201011 at the rate of 16.5% with domestic traffic clocking
a CAGR of 18.5% and International traffic at 14%. This
growth is much higher than the growth witnessed
during the period 1995-96 to 2003-04. Also, it is
evident that the domestic traffic grew more than
three times and the international traffic to and from
India more than doubled in the last 7 years.
Performance of domestic air traffic evaluated for a
longer time frame of twenty years (from 1990-91 to
2010-11) suggests that it grew at an annual average
rate of 10.4%. During the same period, international
passenger traffic grew at 9.4% and total passenger
traffic at 9.9%.
Growth rate in capacity as measured by ASK and the
traffic as measured by RPK was maximum during the
period from 2004-05 to 2009-10 a trend which was
seen from the perspective of passenger growth also.
Average annual growth rate of RPK for Scheduled
Carriers in India is higher than that of ASK for
different periods it was calculated For instance, while
the RPK grew at 19.5% during 2004-05 to 2009-10,
the ASK grew only by 17.1% indicating the increasing
levels of Passenger Load Factor in domestic aviation
market.
The commercial aviation industry has been supported
by the liberalization which allows airlines to open
more routes, add more frequencies and experiment
with new business models. Indian aviation market
suffered a period of declining traffic during 20082009. Although this down turn was largely the result
of the global economic meltdown, difficulties were
compounded by influx of new Capacity.11 It is well
known that Capacity deployment is not amenable to
short term adjustment in the airline industry. From
Table 3 it is evident that although CAGR of RPK in the
three time periods considered has been higher than
ASK, it is found to be insufficient to catch up with the
absolute level of ASK indicating periodic bouts of glut
of supply in the market given the high degree of
sensitivity of passenger traffic to over all global and
domestic economic activity.
? Review of performance of International
passenger Traffic
Underperformance of International passenger traffic as
compared to domestic traffic over the last twenty
years stands established in earlier part of analysis of
this section. In what follows, certain other aspects of
the International traffic performance are discussed
with evidence. Contrary to popular belief, share of
Indian Carriers in International market has actually
increased since the liberalization of market after
years of stagnation in a protected environment.
Trend observed with respect to International
Passengers carried by scheduled carriers to and from
India is given in Table 4.
? General Aviation
General Aviation is an emerging air traffic mode of
importance in recent times. Broadly, this segment
comprises of:
(a) Non-scheduled operations of Tour Operators on a
point to point basis within the country.
(b) Non-scheduled operations of Tour Operators on a
point to point basis to and from a domestic territory
of a country to a foreign country and vice versa.
(c) Other Charter Operations
(d) Business Jets
(e) Helicopter Services.
(f) Non-scheduled operations of scheduled operators15
(g) Balloons and others.
The overall coverage of data is fragmented in nature as
the sector itself is in its state of infancy. Data
availability restricts us to consider only passengers
carried in the domestic segment by Other Charter
Operations, Business Jets, Helicopter Services,
Balloons as mentioned above, together they will be
referred to as Non-Scheduled Operators (NSOPs) in
this section.
India has witnessed a significant growth in the number
of non-scheduled airline operators with total number
of operators having crossed 200 in 2011 from 36
operators in 2000. The present ownership pattern
indicates a fragmented sector with majority of the
players owning less than 4 aircrafts. As per DGCA,
the General Aviation (GA) fleet in India comprises
around 800 small aircrafts and 300 helicopters.
Around 20% of this fleet size is expected to be more
than 25 years old and may not be operational.
Industry sources indicate that revenues of the
General Aviation industry in India are expected to
grow to more than Rs 1,100 crores by end of 20162017 growing at an impressive annual rate of 15%.
The fleet of business jets has expanded from around
55 in 2007 to around 120 in 2010.16
? Drivers of Non-Scheduled Passenger Traffic/
General Aviation
A study by Deloitte Center for Financial Services
(August 2011), forecasts that the number of
millionaire households in India will grow from 2.86
lakh to 6.94 lakh between 2011 and 2020, a growth
rate of 143 per cent. The $5-30 million income group
is likely to see the biggest growth of 161 per cent,
followed by the $1-5 million group at 142 per cent
and the over $30 million group at 115 per cent.
? According to CAPA, in 2009-10 major share of
general aviation traffic originated from Mumbai
followed by Delhi17 indicating the current skewed
growth experienced by India. As this growth
spreads across instead of being islands of
prosperity to Tier 2 and Tier 3 cities, the demand
for NSOPs will increase significantly.
? The Rotary Wing Society of India has identified
growth areas for domestic helicopter industry to
include, emergency medical services, airborne law
enforcement, energy restoration (repair of
damaged electricity towers), aerial photography,
relief and rescue operations, electronic news
gathering, agricultural activities like spraying etc
and commercial services within and between cities.
? Performance of Air Cargo traffic in India
India’s impressive growth in international and domestic
trade over past few years has augured well for the
air-cargo industry in India. Air Cargo in India received
its initial impetus from the 1986 permission, wherein
air taxi operators were allowed to provide on-demand
services primarily to boost tourism on major routes.
Subsequently, the ‘Air Cargo Open Sky Policy’ was
adopted in 1990 initially for 3 years and further
extended in 1992 on a permanent basis, where any
airline whether Domestic or Foreign carriers which
met specified operational and safety requirements,
were allowed to operate scheduled and nonscheduled cargo services to/from any airports in India
wherever customs facilities are available. In addition,
regulatory regime over cargo rates for major export
commodities was abolished so that carriers are free
to set their own rates.
? Key Drivers of growth of Indian aviation
market
? Rising domestic Gross Domestic Product (GDP)
Growth rate of the economy has been steadily rising.
For instance, in the period 1990-91 to 2003-04, the
CAGR of India’s GDP works out to 5.7% which then
rose to 8.6% during 2004-05 to 2010-11. The growing
economic activity resulted in greater business
travel24 by professionals and greater leisure travel
by individuals.
? Expanding middle-income group
These income groups drive the consumption pattern in
India and are primarily concentrated in urban areas.
NCAER analysis reveals that the middle income group
population in 2010 stood at 160 million individuals
i.e. 13.3% of the total population, which is expected
to rise to 547 million in 2025 (i.e. 37.2% of the total
population)25
? Demographic dividend
62% of the population is in the working age group of
15-60 years and this proportion is set to increase in
future indicating a larger employee base, greater
business travel and greater economic activity.26
? Rising urban population
Mckinsey Global Institute’s projections state that
India’s urban population will be 590 million by 2030
i.e. about 40 percent of the total population of India.
The number of million plus cities will increase to 68
by 2030 of which 13 cities will have more than 4
million and six cities will have more than 10 million
persons.27
? Significant market developments
Low Cost Carrier (LCC) model which made air travel
affordable for common man got established firmly in
the domestic market since 2004. This stimulated the
pent up demand for air travel. LCCs along with the
LCC brand of Full Service Carriers (FSCs) constituted
63.3% of the market share in 2009. The domestic
traffic is rapidly shifting towards the LCC model.
Market sources suggest that this has crossed 67%
during 2011-12. Also, the LCCs are reported to have
displayedstrong operational performance
immediately after the recovery witnessed in 2010.
This leads us to believe that Low Cost Operations in a
price sensitive market like India appear to be a more
sustainable business model
? Investments in Airport and related infrastructure
Opening up of the airport infrastructure to private
sector participation fuelled the growth of the air
traffic in India. Total investment made by private
airport operators in the last five years was to the
tune of Rs 30,000 crores spread across Greenfield
development of Hyderabad and Bengaluru
international airports and modernization of Delhi and
Mumbai international airports29. Airports Authority of
India (AAI) continued its unparalleled role in creating
air connectivity across the nation, incurring an
expenditure30 of around Rs 12,500 crores during the
11th Plan period. Rapidly expanding air transport
network aided by massive investments in the airport
infrastructure could be cited as one of the key
reasons for the surge in air passenger traffic in India.
? Growing tourism
In line with the trend observed in growth of India’s GDP,
the tourism sector has displayed stellar performance
during the last decade. During the period from 2001
to 2010, the average annual growth rate of foreign
tourist arrivals in to India and Indian National
departures from India grew by 9.2% and 11.5%
respectively. Domestic tourism was not to be left
behind. Domestic TouristVisits within India stood at
740.2 Million for the year 2010.31 In fact the average
annual growth rate of Domestic Tourist visits within
India for the decade ending 2010 is estimated to be
13.5%. The number of foreign tourist arrivals in India
stood at 5.6 Million in the year 2010 as against 3.46
Million in 2004 and 2.54 Million in 2001. Similarly, the
number of Indian National departures from India
stood at 12.1 Million in 2010 as against 6.21 Million
in 2004 and 4.56 Million in 2001.
? Thrust on Remote area Connectivity
In areas with difficult terrain, air transport offers the
fastest mode of connectivity to remote and
inaccessible regions. Given the thrust of the
Government of India to enhance connectivity in
remote and inaccessible regions of the country and
concerted efforts of some State governments in this
respect, there is a strong likelihood of demand
emanating from these areas in future
The air traffic density can be measured by linking Urban
Per capita income with air passengers. Taking 1000
passengers per Million Urban Capita a recent study
has arrived at a comparative picture. Air traffic
density in India using this measure is very low at 72
as compared to China (282), which is 4 times higher;
Brazil (231), which is 3 times higher; Malaysia (1225)
is 17 times higher, U.S.A. (2896) is 40 times higher
and Sri Lanka (530), which is 7 times higher as
exhibited in Graph 6. This indicates the untapped
market potential given the projected burgeoning
young population and rising disposable income levels
in future.
? International Market Access
Open Sky Agreements between nations forge greater
competition in the International air travel segment.
Increasingly it is recognized that Nation States need
to evolve viable mechanism by which they all stand
to achieve trade gains and efficiency in international
market access in as far as Air traffic rights are
concerned. That is yet to happen. Five Indian Carriers
out of six have now started international operations.
It is therefore expected that such reforms in market
access arrangements as and when it happens will
potentially enhance traffic to and from India. Further,
deregulation of the international air traffic markets
would enable the LCCs to capitalize the opportunities
of newer markets first and enhance growth of
international traffic.
India’s impressive growth in international and domestic
trade over past few years has augured well for the
air-cargo industry in India. The entry of leading
private air-cargo companies has brought in a wave of
increasing automation, mechanization and process
improvement initiatives at major air-cargo terminals
in the country. Such investments in air-cargo
handling at key airports such as Delhi, Mumbai,
Bangalore, Hyderabad, etc. are expected to yield
higher air-cargo throughput and improved service
levels. The current share of air-cargo compared to
other modes of cargo-transportation is fairly low in
India.
The potential for air-cargo growth in India can be
gauged from the fact that some of the global airports
such as Hong Kong, Dubai and Incheon (Seoul) handle
more cargo volume than all Indian airports put
together. Trans-shipment at Indian airports is
currently negligible. Major bottlenecks are absence
of dedicated transshipment infrastructure at airports
and lack of clarity on the trans-shipment Customs
procedure
? Facts & figures
Indian aviation’s economic benefits
Air transport to, from and within India creates three
distinct types of economic benefit. Typically,
studies such as this focus on the „economic
footprint? of the industry, measured by its
contribution to GDP, jobs and tax revenues
generated by the sector and its supply chain. But
the economic value created by the industry is more
than that. The principal benefits are created for
the customer, the passenger or shipper, using the
air transport service. In addition, the connections
created between cities and markets represent an
important infrastructure asset that generates
benefits through enabling foreign direct
investment, business clusters, specialization and
other spill-over impacts on an economy?s
productive capacity.
. Aviation’s economic footprint
Contribution to Indian GDP
The aviation sector contributes INR 330 billion (0.5%)
to Indian GDP. This total comprises:
??INR 147 billion directly contributed through the
output of the aviation sector (airlines, airports and
ground services, aerospace);
??INR 107 billion indirectly contributed through the
aviation sector?s supply chain; and
??INR 77 billion contributed through the spending by
the employees of the aviation sector and its supply
chain.
??In addition there are INR 582 billion in „catalytic?
benefits through tourism, which raises the overall
contribution to INR 912 billion or 1.5% of GDP.
Major employer
The aviation sector supports 1.7 million jobs in India.
This total comprises:
??276,000 jobs directly supported by the aviation
sector;
??841,000 jobs indirectly supported through the
aviation sector?s supply chain; and
??605,000 jobs supported through the spending by
the employees of the aviation sector and its supply
chain.
??In addition there are a further 7.1 million people
employed through the catalytic (tourism) effects of
aviation.
High productivity jobs
The average air transport services employee
generates nearly INR 1.3 million in GVA annually,
which is around 10 times more productive than the
average in India.
Contribution to public finances
The aviation sector pays over INR 87.5 billion in tax
including income tax receipts from employees,
social security contributions and corporation tax
levied on profits. It is estimated that an additional
INR 9.8 billion of government revenue is raised via
the aviation sector’s supply chain and another INR
7.1 billion through taxation of the activities
supported by the spending of employees of both
the aviation sector and its supply chain.
? Consumer benefits for passengers and shippers
From visiting family and friends to shipping high
value products, 70 million passengers and 1.4
million tonnes of freight travelled to, from and
within India. More than 130,000 scheduled
international flights depart India annually, destined
for 70 airports in 50 countries. Domestically, more
than 664,000 flights make 89 million seats
available to passengers annually, destined to 73
airports.
Air passengers resident in India comprise
approximately 53 million of the passenger total.
For the 70 million passenger flights in total,
passengers pay INR 1,755 billion (inclusive of tax),
with Indian residents paying around INR 1,329
billion. This expenditure is likely to significantly
understate the value passengers actually attach to
the flights they use Calculations by Oxford
Economics suggest the value of the benefit to
travelers from flying, in excess of their
expenditure, is worth INR 1,100 billion a year (INR
832 billion for Indian residents).
Air transport is crucial for the distribution of high
value to weight products. Air freight may only
account for 0.5% of the tonnage of global trade
with the rest of the world, but in value terms it
makes up around 34.6% of the total.
Shippers pay airlines INR 165 billion annually to carry
1.4 million tones of freight to, from and within
India. The benefit to shippers, in excess of this
expenditure, is estimated as INR 69 billion. Based
on the share of exports in total merchandise trade,
Indian shippers receive around 45% of this benefit
(INR 31 billion).
? Enabling long-term economic growth
In 2010 there were 357 routes connecting major
Indian airports to urban agglomerations around the
world. On average there were 4 flights per day
along these routes. A total of 66 of these routes
were connecting India to cities of more than 10
million inhabitants, with an average of 7 flights per
day available to passengers. Frequencies are
higher to the most economically important
destinations. For example, passengers benefited
from 8 flights per day between Delhi and Dubai
International Airport, and from more than 59
flights per day from Delhi to Bombay, providing
high speed access for business and leisure
purposes throughout the day. Many of these citypair connections are only possible because of the
traffic density provided by hub airports. India?s
integration into the global air transport network
transforms the possibilities for the Indian economy
by:
??Opening up foreign markets to Indian exports;
??Lowering transport costs, particularly over long
distances, helping to increase competition because
suppliers can service a wider area and potentially
reduce average costs, through increased
economies of scale;
??Increasing the flexibility of labour supply, which
should enhance locative efficiency and bring down
the natural rate of unemployment;
??Encouraging Indian businesses to invest and
specialize in areas that play to the economy’s
strengths;
??Speeding the adoption of new business practices,
such as just-in-time-inventory management that
relies on quick and reliable delivery of essential
supplies;
??Raising productivity and hence the economy’s
long-run supply capacity. It is estimated that a 10%
improvement in connectivity relative to GDP would
see an INR 39.3 billion per annum increase in longrun GDP for the Indian economy.
? Consumer benefits for passengers and shippers
The aviation sector – comprising the airlines together
with the airports, air navigation and other
essential grounds services that make up the air
transport infrastructure – carries over 70 million
passengers1 and 1.4 million tones of air freight to,
from and within India. More than 130,000
scheduled international flights depart India
annually, destined for 70 airports in 50 countries.
Domestically, more than 664,000 flights make 89
million seats available to passengers annually,
destined to 73 airports2.
Among the many reasons that people and businesses
use air transport, people rely on it for holidays and
visiting friends and family; while businesses use air
transport for meeting clients and for the speedy
and reliable delivery of mail and goods often over
great distances. For this reason, the air transport
network has been called the Real World Wide
Web3.
The most important economic benefit generated by
air transport is the value generated for its
consumers, passengers and shippers. Passengers
spent INR 1,755 billion (inclusive of tax) on air
travel in 2009 and shippers spent INR 165 billion
on the transportation of air cargo4. With its speed,
reliability and reach there is no close alternative to
air transport for many of its customers. This means
that many are likely to value air services higher
than what might be suggested by their expenditure
on these services. But this economic value will vary
from flight to flight, and from consumer to
consumer, making it difficult to measure.
? Consumer benefits
The value of consumer benefit varies because as you
fly more often, the value you attach to each
additional flight will in general fall. As frequent
flyers know, the more they fly, the less excited
they get when they step on a plane. There comes a
point when the fare exceeds the value we place on
taking an additional flight, and we choose instead
to spend our money on other things. For this
reason the air fares that we are willing-to-pay do
not reflect the value we place on air transport so
much as the value we place on the last flight we
have flown. Much the same applies to the market
as a whole. Air fares reflect the value placed on the
service by the marginal passengers - those who
would forgo the flight were prices to rise - and not
the value that passengers as a whole place on air
transport services.
For this reason, valuing the consumer benefits for air
passengers and air freight shippers can not be
inferred simply from observed fares and shipping
charges. In addition to the fares paid, we need an
idea of how the passengers and shippers value air
transport other than at the margin. Unfortunately
there is no readily available data on this, and so we
must rely instead on judgment, informed by
economic theory, to guide us. Economics tells us
that the estimated benefits hinge on the sensitivity
of demand to changes in fares – the price elasticity
of demand. Estimates of prices elasticity’s are
available from previous research. Economic theory
also tells us that price elasticity’s will fall as we
move away from the margin, but it offers less
guidance on how much they may fall by. This
matters, because lower the price elasticity – the
less sensitive passengers are to a change in price –
the higher the consumer benefit. It follows that
taxation of air travel or cargo directly reduces the
economic benefit of all passengers and shippers,
as well as, at the margin, stopping a number of
people travelling and stopping a number of
shippers using air cargo services.
? Estimated consumer benefits
Given its sensitivity to our assumption about how
price elasticity’s vary, we have taken a very
conservative assumption that probably
understates the true benefits With this in mind,
we calculate that air passengers and shippers
valued the air transport services they used at over
INR 2,854 billion and INR 233 billion respectively.
Contained within these amounts, the consumer
benefits derived on top of that measured by
expenditure on travel and shipments were about
INR 1,100 billion for passengers and INR 69 billion
for shippers.
The total benefits accruing to passengers using the
Indian air transport system will include those
related to residents and non-residents as well as
passengers already being accounted for under the
benefits associated with the economy at the other
end of international routes. Some 53 million or 76%
of the 70 million passengers using air transport
services to, from and within India were Indian
residents. As for the share of freight shipped by
firms based in India, data is not readily available.
To give a broad indication we have used instead
the share of exports in total merchandise trade.
This is estimated to be 45% of the total trade in
goods in 20095. From this we estimate that, out of
the consumer benefits generated by Indian air
transport and on top of that measured by
expenditure, Indian citizens derived INR 832 billion
in value and Indian shippers around INR 31 billion
in value.
? How aviation enhances economic performance
Improvements in connectivity contribute to the
economic performance of the wider economy
through enhancing its overall level of productivity.
This improvement in productivity in firms outside
the aviation sector comes through two main
channels: through the effects on domestic firms of
increased access to foreign markets, and increased
foreign competition in the home market, and
through the free movement of investment capital
and workers between countries.
Improved connectivity gives Indian-based businesses
greater access to foreign markets, encouraging
exports, and at the same time increases
competition and choice in the home market from
foreign-based producers. In this way, improved
connectivity encourages firms to specialize in areas
where they possess a comparative advantage.
Where firms enjoy a comparative advantage,
international trade provides the opportunity to
better exploit economies of scale, driving down
their costs and prices and thereby benefiting
domestic consumers in the process. Opening
domestic markets to foreign competitors can also
be an important driver behind reducing unit
production costs, either by forcing domestic firms
to adopt best international practices in production
and management methods or by encouraging
innovation. Competition can also benefit domestic
customers by reducing the mark-up over cost that
firms charge their customers, especially where
domestic firms have hitherto enjoyed some shelter
from competition.
Improved connectivity can also enhance an
economy’s performance by making it easier for
firms to invest outside their home country, which is
known as foreign direct investment (FDI). Most
obviously, the link between connectivity and FDI
may come about because foreign investment
necessarily entails some movement of staff:
whether to transfer technical know-how or
management oversight. But increased connectivity
also allows firms to exploit the speed and
reliability of air transport to ship components
between plants in distant locations, without the
need to hold expensive stocks of inventory as a
buffer. Less tangibly, but possibly just as
important, improved connectivity may favor inward
investment as increased passenger traffic and
trade that accompanies improved connectivity can
lead to a more favorable environment for foreign
firms to operate in. Chart 2.2 plots the total value
of FDI built up in individual countries in relation to
their GDP against an index of connectivity
(produced by IATA), that measures the availability
of flights, weighted by the importance of each of
the destinations served. The chart shows that
countries with higher connectivity (measured
relative to their GDP), are in general more
successful at attracting foreign direct investment.
This is emphasized by the upward sloping line that
confirms the statistical relationship between
greater connectivity and greater FDI.
? Connectivity and long-term growth
A thought experiment considering the impact on
trade from eliminating the air transport network
suggests the economic benefit of connectivity is
substantial. Moreover, the experience of
businesses in Europe during the volcanic ashinduced airspace closures of 2010, as just-in-time
supply chains failed, provides a more concrete
illustration of how dependent modern economies
are on their air transport infrastructures.
A number of recent studies have attempted to
quantify the long-term impact on a country’s GDP
that results from an improvement in connectivity.
Measuring connectivity is not straightforward.
shows one measure of Indian connectivity,
compared to other economies Given that the
supply-side benefits of connectivity come through
promoting international trade and inward
investment, any impact is likely to manifest itself
gradually over time. This protracted adjustment
makes it very challenging to disentangle the
contribution that improved connectivity has had on
long-term growth, from the many of other factors
that affect an economy’s performance. This issue is
reflected in the wide range of estimates that
studies have reached for connectivity’s impact on
long-run growth. Three studies undertaken in 2005
and 2006 provide estimates of the impact that
connectivity can have on long-run level of
productivity (and hence GDP). The mechanisms
through which connectivity generates this
economic benefit are those described in Section
2.2. These studies suggest that a 10% increase in
connectivity (relative to GDP) will raise the level of
productivity in the economy by a little under 0.5%
in the long run, with there being a fair degree of
uncertainty around this average estimate11. A
much wider 2006 study, based on a cross-country
statistical analysis of connectivity and productivity,
derived a lower estimate of 0.07% for the elasticity
between connectivity and long-run productivity12.
? Economic footprint
Sections 1 and 2 have looked at the benefits of air
transport services for its customers, and the
longer-term benefits that come through increasing
long-term growth in the economy as a whole. In
this section we turn to the domestic resources that
the aviation sector currently deploys to deliver its
services, together with the domestic goods and
services consumed by the workers who depend on
the sector for their employment. We call the value
added and jobs supported by this economic activity
the aviation sector?s „economic footprint?.
The resources deployed by the aviation sector are
measured by its Gross Value Added (GVA). GVA is
calculated either as the output created by the
sector less the cost of purchased inputs (net
output measure), or by the sum of profits and
wages (before tax) generated from the sector’s
economic activity (income measure). The two
approaches are equivalent. Using either approach,
by adding the GVA of all firms in the economy, one
derives an estimate for the economy’s overall
output (GDP) We refer to this as the sector’s direct
contribution to GDP.
From this direct contribution, the sector’s economic
footprint is calculated by adding to it the output
(and jobs) supported through two other channels,
which we refer to as the indirect and the induced
contributions. The indirect contribution measures
the resources deployed by the aviation sector
through using domestically produced goods and
services produced by other firms – i.e. the
resources used through its supply chain. The GVA
generated through the indirect and direct channels
supports jobs both in the aviation sector and in its
supply chain. The workers whose employment
depends on this activity in turn spend their wages
on goods and services. The induced contribution is
the value of the domestic goods and services
purchased by this workforce. Taken together, these
three channels give the aviation sector?s economic
footprint in terms of GVA and jobs.
The aviation sector contributes to the economy in
two other ways. Through the taxes levied on GVA
(recall that it is equal to the sum of profits and
wages), the aviation sector supports the public
finances, and the public services that depend on
them. Second, through its investment and its use
of advanced technology, the aviation sector
generates more GVA per employee than the
economy as a whole, raising the overall
productivity of the economy.
? Tax contribution
Aviation makes a substantial contribution to the
public finances. In this section we estimate the
corporation tax paid by aviation companies, the
income tax paid by their employees, social security
payments (both employer and employee
contributions), and the revenue collected through
aviation taxes. These estimates reflect the direct
tax payments of the aviation sector. We also
provide an indication of the taxes paid by the
aviation sector’s supply chain and taxes raised
through induced spending channels. They do not
include increases in the overall Indian tax base
driven by aviation’s contribution to investment and
productivity growth in the wider economy.
? Aviation makes a substantial contribution to
Indian tax
The aviation sector contributed over INR 87.5 billion
in taxes through corporation tax and the income
and social security contributions (both employee
and employer contributions). This contribution is
likely to increase further, as the sector recovers
following a number of difficult years where many
firms suffered losses. Very indicatively, it is
estimated that a further INR 16.9 billion of
government revenue is raised via taxation through
the indirect (INR 9.8 billion) and induced (INR 7.1
billion) channels. Not included in the table above
are domestic aviation fuel taxes estimated to be in
the range of INR 15-20 billion.
? Investment and productivity
Apart from these transformative effects on the wider
economy, air transport services – the airlines,
airports and ancillary services, such as air traffic
control – form a capital intensive sector that
invests heavily in aircraft systems and other
advanced technology.
Catalytic effects
? Benefits to Indian tourism
Air transport lies at the heart of global business and
tourism. Through its speed, convenience and
affordability, air transport has expanded the
possiblities of world travel for tourists and
business travellers alike, allowing an ever greater
number of people to experience diversity of
geography, climate, culture and markets.
Tourism, both for business and leisure purposes,
makes a large contribution to the Indian economy,
with foreign visitors spending just over INR 548
billion in the Indian economy each year18. Around
89% of these visitors arrive by air so that foreign
visitors who travel by air spend approximately INR
488 billion.19
? Benefits to Indian trade
Compared to other modes of transport, air freight is
fast and reliable over great distances. However,
these benefits come with a cost attached.
Consequently, it is mostly used to deliver goods
that are light, compact, perishable and that have a
high unit value.
These key characteristics of air freight are most
apparent in the data on the modes of transport
used in world trade. For example, data on the
weight (volume) and value of goods carried by air,
sea and land transport is available for global trade.
While air accounts for just 0.5% of the tonnage of
global trade (Chart 3.6), air freight makes up
34.6% of the value of global trade.
? Conclusion
This study has described and quantified a number of
channels through which aviation in India generates
important economic benefits for its customers and
the wider Indian economy.
Studies of this kind usually focus on the „economic
footprint? of the industry, the GDP and jobs
supported by the industry and its supply chain. We
provide the latest estimates for these metrics. But
the economic value created by the industry is more
than that. It is not just jobs that are threatened if
government policies are badly designed. The
welfare of voting citizens and the effectiveness of
infrastructure critical to the country’s long-term
success in global markets are also at risk.
The welfare of travelling citizens has been
conservatively quantified in this study. Not all
customers of airlines serving Indian airports are
Indian residents, but approximately 76% are. They
currently get an economic benefit estimated to be
worth INR 832 billion. Indicatively, 45% shippers
using air freight services are Indian companies.
Taxing air transport directly reduces the welfare of
these Indian residents and Indian businesses.
The study has also shown what a critical asset
India?s air transport network is, to business and
the wider economy. Connectivity between cities
and markets boosts productivity and provides a
key infrastructure on which modern globalized
businesses depend. Many of these city-pair
connections are dependent on hub airports
through which to generate the traffic density
necessary to sustain them. All airlines supplying
services at Indian airports contribute to generating
these wider economic benefits. These „supplyside? benefits are hard to measure but are easily
illustrated by the experience of the volcanic ash
cloud, which closed much of European airspace for
a week in early 2010. Travellers were stranded.
Globalized supply chains and just-in-time
manufacturing processes came to a halt.
More readily measured is the „economic footprint?
supported, mostly, by the activities of national
airlines. Indian-based airlines were responsible for
carrying 71% of passengers and 78% of freight.
The wages, profits and tax revenues created by
these airlines flows through the Indian economy,
generating multiplier effects on Indian national
income or GDP. The economic benefits for India
created by non-Indian airlines are to be found in
customer welfare and in the part these airlines
play in providing the connectivity infrastructure
between India and overseas cities and markets.
Aviation has a significant footprint in the Indian
economy, supporting 0.5% of Indian GDP and
1,723,000 jobs or 0.4% of the Indian workforce.
Including the sector?s contribution to the tourism
industry, these figures rise to 1.5% of Indian GDP
and 8.8 million jobs, or 1.8% of the workforce.
Also significant is the fact that these are high
productivity jobs. The annual value added (or GVA)
by each employee in air transport services in India
is INR 1.3 million, approximately 10 times higher
than the Indian average of INR 127,000.
Tax revenues from aviation are substantial. Indianbased aviation companies paid INR 87.5 billion
annually in direct taxes and social security
payments. It is estimated that an additional INR
9.8 billion of government revenue is raised via the
aviation sector?s supply chain and INR 7.1 billion
through taxation of the activities supported by the
spending of employees of both the aviation sector
and its supply chain.
All together these points demonstrate that aviation
provides significant economic benefits to the
Indian economy and its citizens, some of which are
unique and essential to the operation of modern
economies.
Bibliography
? Indian Institute of Foreign Trade, Delhi
? Aerospace, India
? Indian Aviation Industry
? Investing Across Borders 2010
? National Transport Development Policy
Committee
? Report of working group on civil aviation sector
? Department of Industrial policy and promotion
? Ministry of commerce and industry
doc_778533915.doc
ON
IMPERIAL STUDY OF FDI IN AIRLINES
AND ITS IMPACT ON INDIAN ECONOMY
SUBMITTED TO
BY
IN PARTIAL FULFILLMENT OF
MASTER OF MANAGEMENT STUDIES (MMS),
UNIVERSITY OF MUMBAI
MARCH 2015
Table of CONTENTS
Chapter No.
1
1.1
1.2
1.3
1.4
1.6
1.5
1.6
2
2.1
2.2
2.2
2.3
3
3.1
.3.2
3.3
3.4
3.5
4
Title
Page NO
Declaration from student
Certificate from Guide
Acknowledgement
Executive Summary
3
4
5
6
Introduction
Background of the study
Background of the topic
Investing Across Border
Goals of IAB indicators
Evaluations and Limitations
Methodological limitations
Indian aviation industry
FDI
Regulatory environment
Taxation and subsidies
Imperial affect on economy
Gross revenue earned by aviation
Indian aviation Market
Performance of international traffic
Facts and figures
Consumers benefits
Economic Footprint
Conclusion
Bibilography
8
11
13
14
17
21
22
23
24
28
32
35
38
42
45
46
DECLARATION
I. Mr. hereby declare that this project report is the record of authentic work
carried out by me during the period from 1ST January to 31st March and has not
been submitted to any other University or Institute for the award of any degree /
diploma etc.
Signature
Date :
CERTIFICATE
This is to certify that Mr. SIDDHARTH JADHAV of Sasmira’s
Institute of Management Studies & Research has successfully completed
the project work titled Imperial Study Of FDI In Airlines And Its Impact
On Indian Economy in partial fulfillment of requirement for the
completion MMS as prescribed by the University of Mumbai.
This project report is the record of authentic work carried out by her
during the period from 1st January2015 to 31st March2015
He has worked under my guidance.
Signature
Project Guide:
Date:
ACKNOWLEDGEMENT
On the very onset of this report I would like to extend my sincere and heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation and encouragement I would not have made headway in this
project.
I am extremely thankful and pay my gratitude to my faculty Mr. Projit Dey for his valuable
guidance and support on completion of this project in it’s presently.
I extend my gratitude to Sasmira’s Institute Of Management and Research for giving me
this opportunity.
I also acknowledge with deep sense of reverence, my gratitude towards my parents and
member of my family who has always supported me morally as well as economically.
At last but not least gratitude goes to all of my friends who directly or indirectly helped me
to complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thank you.
Siddharth Jadhav
EXECUTIVE SUMMARY
Like trade, foreign direct investment (FDI) has occurred
throughout history. From the merchants of Sumer
around 2500 BCE to the East India Company in the
17 century, investors routinely entered new markets
in foreign dominions. In 1970 global FDI totaled $13.3
billion. By 2007 it was nearly 150 times higher,
peaking at $1.9 trillion The economic crisis slashed
global FDI flows by about 40% in 2009, affecting all
economies, sectors, and forms of investment.
Mergers and acquisitions in high-income economies
contracted the quickest after the 2007 subprime
mortgage crisis in the United States contributed to
banking and fiscal crises in Western Europe and
Japan. The contagion gradually spread, affecting new
investment in emerging markets and developing
economies. Developing economies fared marginally
better during the crisis. FDI in developing economies
fell 35% in 2009, compared with 41% in high-income
economies. With the global recession receding
somewhat, FDI will likely recover in the near future.
Most indicators signal that FDI will be higher in 2010
than in 2009. The recovery in FDI is good news for
economies suffering from the global economic
downturn and seeking to stimulate economic growth.
The benefits of FDI for economic development have
been well established. A global network of 80,000
multinational corporations and 800,000 foreign
affiliates has helped create millions of jobs,
transferred technology, upgraded skills, fostered
competition, and contributed to the fiscal standing of
many economies. Through capital spillovers, FDI has
encouraged the adoption of new production
technologies. Foreign companies have also
stimulated knowledge transfers by training local
workers, developing their skills, and introducing new
management practices and better organizational
arrangements. Foreign investment has also helped
break up cozy local oligopolies and cartels.
1
th
3
4
5
Opponents of FDI point out that its impacts are
often limited and in some cases detrimental the
consequences of crowding out local competition,
enclave production with limited forward and
backward linkages, and “race to the bottom” effects
often related to labor and environmental issues.
While the main social argument for FDI is that it
generates employment, job creation may be limited
and work opportunities may even decrease if local
firms are driven out of the market by increased
competition, or if acquired companies are
restructured. Critics also cite cases of severe
pollution and environmental destruction
7
Net FDI inflows: billions of U.S. dollars at current prices
and exchange rates caused by companies in the
extractive and
energy sectors. Though some of these criticisms are
warranted, evidence for such claims is often based on
narrowly-focused studies of certain industries and
economies.
While the potential drawbacks of individual investment
projects should not be underestimated, most research
and empirical evidence finds that, on balance, FDI
helps foster development in recipient economies. The
benefits of FDI are particularly amplified in economies
with good governance, well-functioning institutions,
and transparent, predicable legal environments.
9
The study has also shown what a critical asset India’s
air transport network is, to business and the wider
economy.
Connectivity between cities and markets boosts
productivity and provides a key infrastructure on
which modern globalized businesses depend. Many of
these city-pair connections are dependent on hub
airports through which to generate the traffic density
necessary to sustain them. All airlines supplying
services at Indian airports contribute to generating
these wider economic benefits.
This study has described and quantified a number of
channels through which aviation in India generates
important economic benefits for its customers and
the wider Indian economy.
INTRODUCING THE
INVESTING
ACROSS BORDERS INDICATORS
The Investing Across Borders (IAB) indicators measure
FDI regulation in 4 specific policy areas. They aim to
complement existing measures of the quality of
business environments. Quantitative data and
benchmarking can be useful in stimulating policy
debate and action, both by exposing potential
challenges and by identifying where policy makers
might look for lessons and good practices. Indicators
can also provide a basis for analyzing how different
policy approaches—and different policy reforms—
contribute to broader desired outcomes such as FDI,
competitiveness, and growth. The following examples
illustrate how the areas of regulation measured by
IAB can be reflected in foreign investors’ decisionmaking. A company seeking to expand its global
presence will assess its options before deciding on a
location for its investment. One of the first
determinants of location is whether the company is
allowed to enter and operate in a specific market.
Though most economies have liberalized and opened
most sectors to foreign investment, some industries
continue to be protected from foreign competition.
IAB’s Investing across Sectors indicators find that
while primary and manufacturing sectors are mostly
open, some industries — such as media,
transportation, energy, and telecommunications—
remain restricted in many economies. Some of the
more restrictive economies include large ones such as
China, Mexico, the Philippines, and Thailand.
Even if a foreign company can enter a particular sector,
it may face other barriers to market access and
operations. Onerous start-up procedures, excessive
licensing and permit requirements, and timeconsuming export and import processes are among
the factors that can make an economy less attractive
to foreign investors. IAB”s Starting a Foreign
Business indicators show that in some economies
foreign companies must complete lengthy procedures
to obtain investment approvals, adding weeks and
sometimes months to the start-up time. In other
economies the procedures can be done online and
take only a few days. Once a foreign company has
been established in a new market, it is likely to need
to acquire real estate for its operations.
Administrative barriers to FDI often include
difficulties associated with securing access to land.
The ability to access land or buildings with secure
ownership rights, at transparent prices, and with
limited restrictions can be critical to a foreign
investor’s decision on whether to invest in a new
market. IAB’s Accessing Industrial Land indicators
find that foreign companies cannot own land in some
economies.
In others, leasing land can take up to 5 months. And
while most economies have both cadastre and land
registry systems, less than half of those in the IAB
sample have systems for sharing land-related data
across agencies. A foreign company might also be
concerned about its ability to resolve disputes with
commercial partners.
Complex commercial contracts require reliable and
flexible dispute resolution mechanisms, and
companies often prefer to have alternatives to court
litigation. Investors favor environments where they
have flexibility in deciding on arbitration proceedings
and where outcomes are more secure and easily
enforceable.
Thus a stable and predictable arbitration regime, as
part of the broader legal framework, is another factor
that can affect conditions for FDI. IAB’s Arbitrating
Commercial Disputes indicators show that economies
generally recognize arbitration as a mechanism for
resolving commercial disputes, although some do not
have special arbitration laws.
Party autonomy levels and enforcement mechanisms for
arbitration awards vary. For example, some
economies have adopted rules to ensure prompt
enforcement of arbitration awards. In contrast, in
other economies it takes more than 2 years to
enforce a final arbitration award. The IAB indicators
comprise measures of the characteristics of laws and
regulations (de jure indicators), and their
implementation (de facto indicators). IAB’s Web site
provides open access to these indicators Below are
overviews of the 4 indicator topics:
Investing Across Sectors indicators measure the degree
to which domestic laws allow foreign companies to
establish or acquire local firms. The indicators track
restrictions on foreign equity ownership in 33
sectors, aggregated into 11 sector groups, including
primary, manufacturing, and service sectors.
Starting a Foreign Business indicators record the time,
procedures, and regulations involved in establishing
a local subsidiary of a foreign company in the form of
a limited liability company.
Accessing Industrial Land indicators evaluate legal
options for foreign companies seeking to lease or buy
land in a host economy, the availability of
information about land plots, and the steps involved
in leasing land.
Arbitrating Commercial Disputes indicators assess the
strength of legal frameworks for alternative dispute
resolution, rules for arbitration, and the extent to
which the judiciary supports and facilitates
arbitration. The indicators compare national regimes
for domestic and international arbitration for local
and foreign companies. The indicators are structured
to reward good regulation and efficient processes.
Transparent, predictable, and effective laws and
regulations are critical to ensuring that foreign
investment results in a win-win situation for
investors, host countries, and their citizens. A solid,
consistently applied legal framework gives investors
confidence in the security of their property,
investments, and rights.
The IAB project does not advocate for reducing all
regulatory barriers, but hopes to improve
understanding of how to maximize the development
benefits of FDI through IAB
They are based on standardized questionnaires,
allowing for straightforward international
comparisons of results, providing examples of good
practices, and encouraging exchanges of information
between economies.
? GOALS OF THE IAB INDICATORS
The World Bank Groups Doing Business project provides
the methodological foundation for the IAB
indicators. The Doing Business indicators compare
regulation of domestically owned small and medium
enterprises.
12
Those indicators have helped stimulate hundreds of
reforms worldwide and draw millions of visitors to
their online database every year. Many users of
Doing Business data—including governments,
policymakers, academics, and other stakeholders—
have expressed interest in complementary indicators
on regulation of foreign-owned companies. The IAB
indicators aspire to meet different stakeholders’
needs for information, analysis, and policy action .
Foreign investors and governments concerned about
the competitiveness of their economy’s business
environment have a broad range of resources at their
disposal. some widely used international indicators
and assessments of investment climates.
IAB does not provide a complete picture of economies’
investment climates and should be used in
conjunction with other tools to analyze business
environments, diagnose their strengths and
weaknesses, and, if appropriate, guide reforms. IAB’s
value is based on its ability to identify specific,
actionable, and practical steps that governments can
take to increase domestic investment
competitiveness in the policy and regulatory areas
measured by the IAB indicators. The following
features differentiate IAB from other data sources:
? Actionable, reform-oriented indicators.
The IAB indicators identify specific impediments to FDI
in the legal, regulatory, administrative, and
institutional frameworks of each economy covered.
The indicators are reform-oriented because the
identified problems can be addressed in the short
and medium term to strengthen an economy’s
investment climate.
?
? Local
expertise
The IAB indicators are based on information
collected from more than 2,350 local experts
and practitioners representing leading law and
accounting firms, chambers of commerce, and
investment promotion institutions. These
experts bring a wealth of knowledge based on
their experiences advising foreign investors on
market entry and operations in their economies.
? Focus on laws and their implementation
The IAB indicators evaluate the scope and strength of
laws and regulations as well as, where possible, their
implementation. Many economies have adopted
modern laws and rules, but these are often not
applied effectively. The combined measures of de jure
and de facto performance provide a more
comprehensive, realistic picture of business
conditions.
The IAB report will become a regular publication
measuring changes in FDI regulation worldwide.
Similar initiatives have shown the power of regularly
updated indicators to stimulate dialogue and actions
that can lead to systemic, long-term reforms. IAB’s
ability to capture and recognize these improvements
on a regular basis gives political actors compelling
tools for engaging in strategic communication and for
initiating or sustaining reform momentum.
? EVOLUTION AND LIMITATIONS OF THE IAB
INDICATORS
The IAB indicators have limited thematic coverage. The
4 topics covered by this report were chosen from a
wide range of policy variables that affect investment
climates and influence investment decisions. These
include the host economy’s market size and location,
availability of natural resources, macroeconomic
performance, infrastructure quality, labor and
production costs, and quality of governance and
institutions.13 Many competitive factors (such as
market size ,location, and natural resource
availability) cannot easily be influenced by public
policy. Furthermore, other policy-level drivers of FDI
(such as macroeconomic performance, infrastructure
quality, and human capital) can only be influenced in
the medium to long run. In contrast, most of the
areas of business and FDI regulation measured by
IAB can be affected in the short run and at
comparatively low cost to governments, providing an
excellent opportunity for near-term benefits. In its
conceptual and developmental phases (2006–08) the
IAB project considered and tested indicators
measuring policy areas such as employment of
expatriate workers and managers, investment
incentives and promotion, currency convertibility and
repatriation, expropriation, breach of contract, public
procurement, environmental and social regulation,
and intellectual property. The team ultimately
decided on the more modest thematic coverage of
the 4 topics presented in this report based on what
was desirable, feasible, and practical. IAB favored
topics that could be affected by public policy in the
short term and information that could be captured
through surveys of local experts. It aimed for
indicators that assess the treatment of a typical
foreign investor and offer enough variation across
economies to warrant the development of global
indicator set. While legal and regulatory frameworks
for FDI are typically not the primary drivers of
investment decision, all other conditions being equal,
they can tip an investment decision in favor of a
particular economy. Strong, stable legal and
regulatory frameworks help create a more
transparent, predictable business environment
conducive to business and investment.
? Substantive limitations
?? IAB
focuses on regulation of FDI, not portfolio
investment.
14
?? Thematic
coverage is limited to 4 discrete policy
areas.
?? IAB
focuses on national laws and, in some cases, on
countries’ ratifications of international conventions.
It does not focus on international investment
agreements.
?? The
project does not cover legal regimes for special
economic zones (SEZs), export processing zones
(EPZs), and other areas governed by special legal
frameworks designed to promote FDI and exports.
? Methodological limitations
?? IAB
is not a survey of investor or company
perceptions.
?? IAB
data are not based on a statistically significant
sample of respondents in each economy.
?? The
IAB indicators are not necessarily representative
of all investment projects.
?? Data
on the efficiency of administrative processes
refer to each economy’s largest business city only.
?? For
these data, the methodology assumes that an
investor and its legal counsel have full information on
what is required and that they do not waste time
when completing procedures.
?? The
IAB indicators are not specifically designed to
indicate whether treatment of foreign investors is
more or less favorable than that of domestic
enterprises.
?
Limits to interpretation and use
?? The
IAB indicators do not examine whether more
regulation is preferable to less. They focus on good
regulation.
?? IAB
data should not be used as a proxy for
government reforms in general, and governments
should not assume that improvements in the
indicator scores will increase FDI. Due to these and
other limitations, the IAB indicators are only partial
measures of the topics they cover. They are limited in
scope and explanatory power when it comes to actual
policies and business realities. Circumstances in each
economy must be considered when interpreting the
indicators and their implications for policies and the
investment climate.
Investing Across Borders is a new initiative that the IAB
team aims to continue to improve in the future. Over
time the team hopes to increase the number of
economies surveyed, introduce rankings and other
direct comparisons for each topic measured, and
engage a growing number of questionnaire
respondents. Though there are currently no plans to
expand the report’s thematic coverage to other areas
of FDI regulation, this option will be considered if
there is specific and sufficient demand from
governments or other stakeholders to carry out the
additional research. The IAB team also intends to
leverage the report’s findings in the research,
analysis, and reform advisory work of the World Bank
Group and its partners. Any parties interested in
collaborating on any of these areas are welcome to
contact the IAB team. The team would also be
grateful for feedback on the data, methodology, and
overall project design that would make IAB a better,
more useful resource for its users. Investing Across
Borders 2010 (IAB) presents cross country indicators
analyzing laws, regulations, and practices affecting
foreign direct investment (FDI) in 87 economies. The
indicators focus on 4 thematic areas measuring how
foreign companies invest across sectors, start local
businesses, access industrial land, and arbitrate
commercial disputes. The indicators combine
analysis of laws and regulations, as well as their
implementation. They explore differences across
countries to identify good practices, facilitate
learning opportunities, stimulate reforms, and
provide cross-country data for research and analysis.
The project’s methodology is based on the World
Bank Group’s Doing Business initiative. The IAB
indicators draw on data collected through a survey of
lawyers, other professional service providers (mainly
accounting and consulting firms), investment
promotion institutions, chambers of commerce, and
other expert respondents in each of the countries
measured. Between April and December 2009 more
1
than 2,350 experts in 87 economies responded to the
survey to provide data for this report.
This chapter presents the report’s main findings
including examples of FDI competitiveness-enhancing
practices for each indicator area. It also provides key
results for each region. IAB does not measure all
aspects of the business environment that matter to
investors. For example, it does not measure security,
macroeconomic stability, market size and potential,
corruption, skill levels, or infrastructure quality. Still
the indicators provide a starting point for
governments seeking to improve their
competitiveness in attracting foreign investment.
Restrictive and obsolete laws and regulations impede
the proceeding of regulation in the aviation industry
Most of the 87 economies measured by IAB have FDIspecific restrictions that hinder foreign investment..
While there are few restrictions on foreign ownership
in the primary sectors and manufacturing, services—
such as media, transportation, and electricity—have
stricter limits on foreign participation
In some sectors—such as banking, insurance, and media
—laws often limit the share of foreign equity
ownership allowed in enterprises. In others—such as
transportation and electricity—state-owned
monopolies preclude both foreign and domestic
private firms from engaging in the sectors.
When it comes to international commercial arbitration,
nearly 10% of IAB countries do not have special
statutes for commercial arbitration.
Furthermore, 1 in 4 countries has not ratified the New
York Convention, the ICSID Convention, or both.2
Adherence to and implementation of international
and regional conventions on arbitration signal a
government’s commitment to the rule of law and its
investment treaty obligations, which reassures
investors. Red tape and poor implementation of laws
create further barriers to FDI The IAB indicators go
beyond analyzing the text of laws and the ratification
of international conventions. They also examine the
typical experience of investors as they go through
administrative processes and interact with public
institutions. For instance, the indicators find that
leasing privately held industrial land takes, on
average, 2 months—and leasing public land almost 5
months But there is also large variation across
countries. Leasing private industrial land in
Nicaragua and Sierra Leone typically requires half a
year, as opposed to less than 2 weeks in Armenia, the
Republic of Korea, and Sudan. The amount of time
required to enforce an arbitration award in local
courts also varies by country. On average, more than
a year is needed in the South Asian economies
measured by IAB.
? Good regulations and efficient processes matter for
FDI
Countries with poor regulations and inefficient
processes for foreign companies receive less FDI and
have smaller accumulated stocks of FDI (figure 2.6).
Based on IAB results, countries tend to attract more
FDI if they allow foreign ownership of companies in a
variety of sectors, make start-up, land acquisition,
and commercial arbitration procedures efficient and
transparent, and have strong laws protecting
investor interests. But this correlation does not imply
existence or direction of a causal relationship. Many
other variables—such as market size, political
stability, infrastructure quality, or level of economic
development—are likely to better explain the
relationship. IAB also finds that countries with
smaller populations and markets tend to have fewer
restrictions on FDI. And countries that have done
particularly well in attracting FDI (before the recent
economic crisis)— such as Ireland, Singapore, the
United Kingdom, and the United States—also score
well
? INDIAN AVIATION INDUSTRY
Through turbulent times, FDI relaxation alone not a
game changer The Indian Aviation Industry has
been going through a turbulent phase over the past
several years facing multiple headwinds – high oil
prices and limited pricing power contributed by
industry wide over capacity and periods of subdued
demand growth. Over the near term the challenges
facing the airline operators are related to high debt
burden and liquidity constraints - most operators
need significant equity infusion to effect a
meaningful improvement in balance sheet.
Improved financial profile would also allow these
players to focus on steps to improve long term
viability and brand building through differentiated
customer service. Over the long term the operators
need to focus on improving cost structure, through
rationalization at all levels including mix of fleet
and routes, aimed at cost efficiency. At the industry
level, long term viability also requires return of
pricing power through better alignment of capacity
to the underlying demand growth. While in the
beginning of 2008-09, the sector was impacted by
sharp rise in crude oil prices, it was the decline in
passenger traffic growth which led to severe
underperformance during H2, 2008-09 to H1 200910. The operating environment improved for a brief
period in 2010-11 on back of recovery in passenger
traffic, industry-wide capacity discipline and
relatively stable fuel prices. However, elevated fuel
prices over the last three quarters coupled with
intense competition and unfavorable foreign
exchange environment has again deteriorated the
financial performance of airlines. During this
period, while the passenger traffic growth has been
steady (averaging 14% in 9m 2011-12), intense
competition has impacted yields and forced airlines
back into losses in an inflated cost base scenario. To
address the concerns surrounding the operating
viability of Indian carriers, the Government on its
part has recently initiated a series of measures
including
(a) proposal to allow foreign carriers to make
strategic investments (up to 49% stake) in Indian
Carriers
(b) proposal to allow airlines to directly import ATF
(c) lifting the freeze on international expansions of
private airlines and
(d) financial assistance to the national carrier.
However, these steps alone may not be adequate to
address the fundamental problems affecting the
industry.
While the domestic airlines have not been able to
attract foreign investors (up to 49% FDI is allowed,
though foreign airlines are currently not allowed any
stake), foreign airlines may be interested in taking
strategic stakes due to their deeper business
understanding, longer investment horizons and
overall longer term commitment towards the global
aviation industry. Healthy passenger traffic growth
on account of favorable demographics, rising
disposable incomes and low air travel penetration
could attract long-term strategic investments in the
sector. However, in our opinion, there are two key
challenges: i) aviation economics is currently not
favorable in India resulting in weak financial
performance of airlines and ii) Internationally, too
airlines are going through period of stress which
could possibly dissuade their investment plans in
newer markets. Besides, foreign carriers already
enjoy significant market share of profitable
international routes and have wide access to Indian
market through code-sharing arrangements with
domestic players. Given these considerations, we
believe, foreign airlines are likely to be more cautious
in their investment decisions and strategies are likely
to be long drawn rather than focused on short-term
valuations. On the proposal to allow import of ATF,
we feel that the duty differential between sales tax
(averaging around 22-26% for domestic fuel uplifts)
being currently paid by airlines on domestic routes
and import duty (8.5%-10.0%) is an attractive
proposition for airlines. However the challenges in
importing, storing and transporting jet fuel will be a
considerable roadblock for airlines due to OMCs
monopoly on infrastructure at most Indian airports.
From the working capital standpoint too, airlines will
need to deploy significant amount of resources in
sourcing fuel which may not be easy given the
stretched balance sheets and tight liquidity profile of
most airlines.
Historically, the Indian aviation sector has been a
laggard relative to its growth potential due to
excessive regulations and taxations, government
ownership of airlines and resulting high cost of air
travel. However, this has changed rapidly over the
last decade with the sector showing explosive growth
supported by structural reforms, airport
modernizations, entry of private airlines, adoption of
low fare - no frills models and improvement in service
standards. Like elsewhere in the world, air travel is
been transformed into a mode of mass transportation
and is gradually shedding its elitist image.
? Strong passenger traffic growth aided by
buoyant economy, favorable
demographics, rising disposable incomes
and low penetration levels
India aviation industry promises huge growth potential
due to large and growing middle class population,
favorable demographics, rapid economic growth,
higher disposable incomes, rising aspirations of the
middle class, and overall low penetration levels (less
than 3%). The industry has grown at a 16% CAGR in
passenger traffic terms over the past decade. With
advent of LCCs and resultant decline in yields,
passenger traffic growth which averaged 13% in the
first half has increased substantially to 19% CAGR
during 2006-2011. Despite strong growth, air travel
penetration in India remains among the lowest in the
world. In fact, air travel penetration in India is less
than half of that in China where people take 0.2 trips
per person per year; indicating strong long term
growth potential. A comparative statistic in United
States, the world’s largest domestic aviation market
stands at 2 trips per person per year. We expect
passenger demand to remain stable and grow
between 12-15% in the medium term, assuming a no
major weakness in GDP growth going forward.
? However domestic airlines operate under
high cost environment; intense
competition has constrained yields;
aggressive fleet expansions have
impacted profitability and capital
structures
Despite reforms, the domestic aviation sector continues
to operate under high cost environment due to high
taxes on Aviation Turbine Fuel (ATF), high airport
charges, significant congestion at major airports,
dearth of experienced commercial pilots, inflexible
labor laws and overall higher cost of capital. While
most of these factors are not under direct control of
airline operators, the problems have compounded
due to industry-wide capacity additions, much in
excess of actual demand. Intense competitive
pressure from Low cost carriers (focusing on
maximizing load factors) and national carrier (looking
to regain lost market share) have constrained yields
from rising in-sync with the elevated cost base.
Besides, aggressive fleet expansions (LCCs have
added aircrafts mainly on long-term operating leases;
FSC’s have purchased aircrafts – debt financed, most
often backed by guarantees from the US EXIM Bank
or Europe’s ECA) to leverage upon the anticipated
robust growth and to support international
operations have significantly impacted the capital
structure and weakened the credit profile of most
domestic airlines.
? Low-cost model now dominating the
skies; viability remains to be seen
Internationally the LCC model came into existence when
the US Congress passed the Airline Deregulation Act
in 1978 easing the entry of new companies into the
business and giving them freedom to set their own
fares and choose routes (Prior to this routes and
fares were fixed by a Government Agency). This was
followed by entry of carriers like Southwest, which
pioneered the LCC concept. Majority (~60-65%) of an
airline cost are dependent on external factors, which
can’t be managed by an LCC. This includes the fuel
cost (~40%), maintenance cost (~12%) and
ownership cost (~12-15%). LCCs try to achieve a cost
advantage in other ways by avoiding the in-flight
services, operating from secondary airports, selling
tickets through the internet, higher number of seats
in the aircraft, inventory reduction through use of
similar aircraft and lower employees per aircraft.
The Indian aviation sector was exposed to intense
competition with the advent of a low-cost airline - Air
Deccan back in 2003. The success of Air Deccan
spurred the entry of other LCCs like SpiceJet, Indigo,
Go Air and subsequently low fare offerings from Jet
airways and Kingfisher airlines. As a result, the
sector which was completely dominated by fullservice airlines till a decade ago is now dominated by
low-cost airlines. However, longer term viability of
LCCs models in India remains to be seen (Kingfisher
exited the segment recently) as airport charges are
same for FSCs and LCCs in India. Besides, the fuel
costs forms a larger proportion of overall costs as
compared to international standards due to higher
central and state government levies (viability of
direct ATF imports remains to be seen due to lack of
supporting infrastructure) and high congestion at
major airports (half an hour hovering at major airport
could increase fuel costs by Rs.60,000 to Rs. 115,000
depending on aircraft, besides impacting aircraft
utilizations). These constraint can be resolved only if
there significant improvement in infrastructure such
that LCCs could operate on secondary airports.
? Aerospace – Indian Regulatory & Policy
Environment
Being a sector of strategic importance, the Indian
government has played an important role in the
development of aerospace sector. The sector was
highly regulated and controlled by the state until last
decade.
? Investment measures
The Government encourages private investment in both
the civil and defence aerospace sector with the goal
of encouraging technology transfers and achieving
indigenization. Over the last decade, there has been
substantial liberalization in the civil aviation sector;
domestic private players are now allowed in
aerospace manufacturing & R&D and 100% FDI is
allowed under automatic route for most of the
activities. The investment limits for domestic and
foreign private participation in various aerospace
activities are as below:
??Manufacturing and R&D activity is allowed 100% FDI
on automatic route in all areas, except air traffic
services.
??In defence sector, 100% domestic private investment
is allowed but only 26% FDI is permitted in the
manufacture of defence equipment, which is also
subject to licensing requirements.
??100% FDI permitted under automatic route for MRO,
flying training institutes and technical training
institutes.
??100% FDI under the automatic route is permitted in
setting up of Greenfield airport projects
??FDI up to 49% is permitted for scheduled air transport
services/domestic scheduled passenger airlines
under the automatic route. NRI investment is
permitted up to 100% under the automatic route.
However, no direct or indirect equity participation by
foreign airlines is allowed.
??For non-scheduled air transport services/nonscheduled airlines, chartered airlines and cargo
airlines, FDI up to 74%is permitted under the
automatic route. NRI investment is permitted up to
100% under the automatic route.
??FDI up to 74% and NRI investment up to 100%under
the automatic route is permitted for ground handling
services subject to regulations in the sector and
security clearances.
??FDI up to 100% is permitted under the automatic
route for helicopter services / sea plane services
requiring DGCA approval. A significant initiative of
the government has been the introduction of defence
offset policy with effect from 2008, which mandates
foreign aircraft OEMs to outsource a minimum of 30%
of defence procurement to Indian companies, in the
areas of infrastructure, technology sharing,
components or services. Players like Air India have
for instance entered into an agreement with Boeing
with a 50% offset obligation. Such policies have
provided an opportunity for Indian manufacturers to
enter the aerospace manufacturing and gain
expertise in high tech industry with its stringent
requirements for safety, quality control and
precision.
? Taxation and subsidies
The government provides various tax incentives to the
domestic and foreign manufacturers for R&D
activities and for establishments in the Special
Economic Zones, as provided in the table below.
Deductions from Income tax Accelerated depreciation
of 40% is available for airplanes & aero-engine Tax
exemptions/ Tax holidays 100% tax exemption for
airport projects for a period of 10 years R&D related
tax deduction If certain conditions are met, deduction
is available of one and one half times of scientific
research expenditure incurred by a company on in
house
? R&D facility
Royalty/ fee waiver Royalty/fees for technical services
received by a foreign company under an agreement
with Government for providing services in or outside
India in projects connected with the security of India,
is exempt, if such foreign company is notified by
Central Government in the Official Gazette Exemption
from withholding tax Exemption from payment of
withholding tax on lease rental incomes on aircrafts
and engines earned by a non-resident lessor from an
Indian company with respect to lease agreements
which have been signed prior to 31 March 2007
The tax incentives provided to the manufacturers in the
aerospace segment are not adequate to provide a
relief against the multiple levels of taxes levied, that
often renders the sector uncompetitive. For instance,
aircraft servicing activities in India are subjected to
variety of levies such as customs duties, service tax
and VAT. Further, domestic manufacturers supplying
to the defence sector are often disadvantaged
against foreign vendors as the latter often enjoys
various tax and duty exemptions for its supplies from
abroad to the Ministry of Defence. Imports by MoD
from foreign vendors do not attract customs duty and
other levies like excise duty, sales tax and VAT are
not applicable to imported products. Further services
availed by foreign vendor from India are exempt as
these are treated as export services. In contrast,
domestic suppliers are subject to various duties like
excise duty, CST, and VAT. Additionally, service tax is
applicable on input services like payment on
Technical knowhow/ engineering services.
? Focus on Research & Development
There are numerous government research institutes
and organisations in India that carry out intensive
research and development for the aerospace sector,
namely Hindustan Aeronautics Limited (HAL),
Defence Research and Development Organisation
(DRDO), National Aerospace Laboratories (NAL),
ISRO, etc. However, the progress on R&D front has
been relatively slow. Recognising the future needs of
the defence sector, the government has invited
private sector participation from domestic as well as
foreign players in research and development
activities, providing 80% funding to the projects.
? Efforts of State Governments
State Governments have also taken several initiatives
for the development of Indian aerospace sector. The
Tamil Nadu Government plans to establish an aero
park for global aerospace and aeronautics industry in
the areas of design, manufacture and maintenance of
aircrafts. The park will be similar to those in Dubai,
China and Singapore. Similarly, the Andhra Pradesh
Government has plans for two aerospace and
precision engineering Special Economic Zones (SEZs)
in the state.
? Role of Air Transport in the
Economy
Role of Air Transport
In an increasingly globalised economy, air transport is a
vital element of the country’s transport
infrastructure. The impact of civil aviation as a sector
on the general economic activity has been studied
systematically and documented for some of the
Western developed countries. By itself, the Civil
Aviation Sector contributes significantly to the
process of development by generating employment
opportunities directly and indirectly besides
facilitating enhancement of productivity and
efficiency in the movement of goods and services.
Civil Aviation is a key infrastructure sector that
facilitates the growth of business, trade and tourism,
with significant multiplier effects across the
economy.
Doubtlessly, air transport has contributed to the rapid
growth in India’s international trade in recent
decades by offering a reliable and faster mode of
transport services to move products and personnel
across long distances. Therefore, sustaining a viable
aviation industry is vital if the economy is to reap the
full benefits of the future growth in foreign trade and
investment. Industries that rely most heavily on air
transport for their international freight shipments
include high growth sectors such as pharmaceuticals,
office equipment and electronic equipment sectors
besides those that have high value to weight
products.
Thus, it has been observed that high growth sectors in
emerging markets are heavily dependent on the
services of the aviation industry. Increased air
connectivity enables manufacturing enterprises to
exploit the speed and reliability of air transport to
ship components across firms that are based in
different and distant locations thereby minimizing
the inventory cost. Countries with higher connectivity
in general are stated to be more successful at
attracting Foreign Direct Investment. Role of air
transport is crucial for the development of Tourism
industry. Tourism makes a large and growing
contribution to the Indian economy.
The Tourism Satellite Account developed for India for
the year 2002-03 confirms tourism as one of the
largest sectors in the economy. Tourism value added
accounts for 2.78 percent of the GDP in terms the
direct contribution; when indirect effects are also
accounted for, the share of tourism in the GDP is 5.83
percent.
In absolute terms, tourism related jobs are estimated to
be in the region of about 21 million. 2 Employment in
the Indian tourism industry is dependent on the
aviation industry since 90% of foreign visitors out of
5.11 Million arrived by air in the year 2009.3 Global
evidences suggest that in U.S.A.
civil aviation activity within the overall economy was
responsible for generating 12 million jobs, USD 1.3
trillion in total economic activity and 5.6 percent of
GDP in 2009.4 In UK, the contribution of aviation
sector to its GDP is said to be to the tune of £53.3
billion (3.8%) to its GDP.5 The most important
contribution aviation makes to the economy is
through its catalytic impact on the performance of
other industries and as a facilitator of their growth.
Recent research by Oxford Economics reveals that the
direct contribution of aviation sector in India to its
GDP is 0.5% for the year 2009. If the Catalytic impact
of Civil Aviation is included, the contribution to GDP
is 1.5%. Total number persons employed in Civil
Aviation sector is estimated to be 1.5 Million and if
we include the catalytic impact then it is 10 million
persons.
Globally for every $ 100 of output produced and every
100 jobs generated by air transport in the economy
trigger additional demand of approximately $325
worth of output and 610 jobs in other industries.
During the year 2010-11, air transport carried 54 Million
domestic passengers and 37 Million International
passengers besides transporting 1.7 Million Metric
tonnes of domestic and international cargo. Air
transport is crucial for the distribution of high value
to weight products and also for goods that are to be
transported speedily.
Civil Aviation sector makes a substantial contribution to
public finances. These include, the Service tax paid
by air passengers, corporation tax paid by airline
companies, airport operators and other ground
support service enterprises,
MRO firms and income tax paid by their respective
employees, besides the revenue collected through
taxes on fuel and equipments.
Thus, the economic foot-print of the Civil Aviation
sector which reflects the value addition and the
direct and indirect employment created by activities
of the sector appear to be much deeper and wider in
terms of its multiplier effect.
? Snapshot of the Indian Civil Aviation Sector
The size of a particular industry in a given year is
assessed by the total income generated by
enterprises in that industry and the employment
generated by the said industry.
These are generally reckoned to be the key parameters
to evaluate the relative importance of a sector in an
economy. It is with this objective, an attempt has
been made to estimate the size of the civil aviation
sector in India based on available information is
evident that scheduled airlines in India contribute to
over 50% of the gross income of the Civil Aviation
sector in India.
While income of the scheduled carriers operating in
India does include income from their global
operations, income of the international airlines
having operations in India is not part of the income
shown under scheduled air lines, which according to
industry sources would be in the region of about
Rs.20,000 crores for 2010-11. If this is taken into
account then the size of airline industry alone would
exceed Rs.60,000 crores.
Estimated Gross
revenue earned
by sub-sectors
of Indian Civil
Aviation sector
Sub-Sectors
Gross income (Rs.
Crores)
Airlines
Scheduled
43,352
Non-Scheduled
1,528
Total
44,880
Airports
AAI
5,734
Private
3,805
Total
9,539
Maintenance
Repair and
Overhaul (MRO)
4,000
Air cargo and
Express
Industry
19,000
Ground handling
2,000
Aviation
Academies
325
Total
79,744
? Indian Aviation Market
? Performance of Scheduled Passenger Traffic in India
In the last two decades, the fastest growth in overall air
traffic in India was witnessed during 2004-05 to 201011 at the rate of 16.5% with domestic traffic clocking
a CAGR of 18.5% and International traffic at 14%. This
growth is much higher than the growth witnessed
during the period 1995-96 to 2003-04. Also, it is
evident that the domestic traffic grew more than
three times and the international traffic to and from
India more than doubled in the last 7 years.
Performance of domestic air traffic evaluated for a
longer time frame of twenty years (from 1990-91 to
2010-11) suggests that it grew at an annual average
rate of 10.4%. During the same period, international
passenger traffic grew at 9.4% and total passenger
traffic at 9.9%.
Growth rate in capacity as measured by ASK and the
traffic as measured by RPK was maximum during the
period from 2004-05 to 2009-10 a trend which was
seen from the perspective of passenger growth also.
Average annual growth rate of RPK for Scheduled
Carriers in India is higher than that of ASK for
different periods it was calculated For instance, while
the RPK grew at 19.5% during 2004-05 to 2009-10,
the ASK grew only by 17.1% indicating the increasing
levels of Passenger Load Factor in domestic aviation
market.
The commercial aviation industry has been supported
by the liberalization which allows airlines to open
more routes, add more frequencies and experiment
with new business models. Indian aviation market
suffered a period of declining traffic during 20082009. Although this down turn was largely the result
of the global economic meltdown, difficulties were
compounded by influx of new Capacity.11 It is well
known that Capacity deployment is not amenable to
short term adjustment in the airline industry. From
Table 3 it is evident that although CAGR of RPK in the
three time periods considered has been higher than
ASK, it is found to be insufficient to catch up with the
absolute level of ASK indicating periodic bouts of glut
of supply in the market given the high degree of
sensitivity of passenger traffic to over all global and
domestic economic activity.
? Review of performance of International
passenger Traffic
Underperformance of International passenger traffic as
compared to domestic traffic over the last twenty
years stands established in earlier part of analysis of
this section. In what follows, certain other aspects of
the International traffic performance are discussed
with evidence. Contrary to popular belief, share of
Indian Carriers in International market has actually
increased since the liberalization of market after
years of stagnation in a protected environment.
Trend observed with respect to International
Passengers carried by scheduled carriers to and from
India is given in Table 4.
? General Aviation
General Aviation is an emerging air traffic mode of
importance in recent times. Broadly, this segment
comprises of:
(a) Non-scheduled operations of Tour Operators on a
point to point basis within the country.
(b) Non-scheduled operations of Tour Operators on a
point to point basis to and from a domestic territory
of a country to a foreign country and vice versa.
(c) Other Charter Operations
(d) Business Jets
(e) Helicopter Services.
(f) Non-scheduled operations of scheduled operators15
(g) Balloons and others.
The overall coverage of data is fragmented in nature as
the sector itself is in its state of infancy. Data
availability restricts us to consider only passengers
carried in the domestic segment by Other Charter
Operations, Business Jets, Helicopter Services,
Balloons as mentioned above, together they will be
referred to as Non-Scheduled Operators (NSOPs) in
this section.
India has witnessed a significant growth in the number
of non-scheduled airline operators with total number
of operators having crossed 200 in 2011 from 36
operators in 2000. The present ownership pattern
indicates a fragmented sector with majority of the
players owning less than 4 aircrafts. As per DGCA,
the General Aviation (GA) fleet in India comprises
around 800 small aircrafts and 300 helicopters.
Around 20% of this fleet size is expected to be more
than 25 years old and may not be operational.
Industry sources indicate that revenues of the
General Aviation industry in India are expected to
grow to more than Rs 1,100 crores by end of 20162017 growing at an impressive annual rate of 15%.
The fleet of business jets has expanded from around
55 in 2007 to around 120 in 2010.16
? Drivers of Non-Scheduled Passenger Traffic/
General Aviation
A study by Deloitte Center for Financial Services
(August 2011), forecasts that the number of
millionaire households in India will grow from 2.86
lakh to 6.94 lakh between 2011 and 2020, a growth
rate of 143 per cent. The $5-30 million income group
is likely to see the biggest growth of 161 per cent,
followed by the $1-5 million group at 142 per cent
and the over $30 million group at 115 per cent.
? According to CAPA, in 2009-10 major share of
general aviation traffic originated from Mumbai
followed by Delhi17 indicating the current skewed
growth experienced by India. As this growth
spreads across instead of being islands of
prosperity to Tier 2 and Tier 3 cities, the demand
for NSOPs will increase significantly.
? The Rotary Wing Society of India has identified
growth areas for domestic helicopter industry to
include, emergency medical services, airborne law
enforcement, energy restoration (repair of
damaged electricity towers), aerial photography,
relief and rescue operations, electronic news
gathering, agricultural activities like spraying etc
and commercial services within and between cities.
? Performance of Air Cargo traffic in India
India’s impressive growth in international and domestic
trade over past few years has augured well for the
air-cargo industry in India. Air Cargo in India received
its initial impetus from the 1986 permission, wherein
air taxi operators were allowed to provide on-demand
services primarily to boost tourism on major routes.
Subsequently, the ‘Air Cargo Open Sky Policy’ was
adopted in 1990 initially for 3 years and further
extended in 1992 on a permanent basis, where any
airline whether Domestic or Foreign carriers which
met specified operational and safety requirements,
were allowed to operate scheduled and nonscheduled cargo services to/from any airports in India
wherever customs facilities are available. In addition,
regulatory regime over cargo rates for major export
commodities was abolished so that carriers are free
to set their own rates.
? Key Drivers of growth of Indian aviation
market
? Rising domestic Gross Domestic Product (GDP)
Growth rate of the economy has been steadily rising.
For instance, in the period 1990-91 to 2003-04, the
CAGR of India’s GDP works out to 5.7% which then
rose to 8.6% during 2004-05 to 2010-11. The growing
economic activity resulted in greater business
travel24 by professionals and greater leisure travel
by individuals.
? Expanding middle-income group
These income groups drive the consumption pattern in
India and are primarily concentrated in urban areas.
NCAER analysis reveals that the middle income group
population in 2010 stood at 160 million individuals
i.e. 13.3% of the total population, which is expected
to rise to 547 million in 2025 (i.e. 37.2% of the total
population)25
? Demographic dividend
62% of the population is in the working age group of
15-60 years and this proportion is set to increase in
future indicating a larger employee base, greater
business travel and greater economic activity.26
? Rising urban population
Mckinsey Global Institute’s projections state that
India’s urban population will be 590 million by 2030
i.e. about 40 percent of the total population of India.
The number of million plus cities will increase to 68
by 2030 of which 13 cities will have more than 4
million and six cities will have more than 10 million
persons.27
? Significant market developments
Low Cost Carrier (LCC) model which made air travel
affordable for common man got established firmly in
the domestic market since 2004. This stimulated the
pent up demand for air travel. LCCs along with the
LCC brand of Full Service Carriers (FSCs) constituted
63.3% of the market share in 2009. The domestic
traffic is rapidly shifting towards the LCC model.
Market sources suggest that this has crossed 67%
during 2011-12. Also, the LCCs are reported to have
displayedstrong operational performance
immediately after the recovery witnessed in 2010.
This leads us to believe that Low Cost Operations in a
price sensitive market like India appear to be a more
sustainable business model
? Investments in Airport and related infrastructure
Opening up of the airport infrastructure to private
sector participation fuelled the growth of the air
traffic in India. Total investment made by private
airport operators in the last five years was to the
tune of Rs 30,000 crores spread across Greenfield
development of Hyderabad and Bengaluru
international airports and modernization of Delhi and
Mumbai international airports29. Airports Authority of
India (AAI) continued its unparalleled role in creating
air connectivity across the nation, incurring an
expenditure30 of around Rs 12,500 crores during the
11th Plan period. Rapidly expanding air transport
network aided by massive investments in the airport
infrastructure could be cited as one of the key
reasons for the surge in air passenger traffic in India.
? Growing tourism
In line with the trend observed in growth of India’s GDP,
the tourism sector has displayed stellar performance
during the last decade. During the period from 2001
to 2010, the average annual growth rate of foreign
tourist arrivals in to India and Indian National
departures from India grew by 9.2% and 11.5%
respectively. Domestic tourism was not to be left
behind. Domestic TouristVisits within India stood at
740.2 Million for the year 2010.31 In fact the average
annual growth rate of Domestic Tourist visits within
India for the decade ending 2010 is estimated to be
13.5%. The number of foreign tourist arrivals in India
stood at 5.6 Million in the year 2010 as against 3.46
Million in 2004 and 2.54 Million in 2001. Similarly, the
number of Indian National departures from India
stood at 12.1 Million in 2010 as against 6.21 Million
in 2004 and 4.56 Million in 2001.
? Thrust on Remote area Connectivity
In areas with difficult terrain, air transport offers the
fastest mode of connectivity to remote and
inaccessible regions. Given the thrust of the
Government of India to enhance connectivity in
remote and inaccessible regions of the country and
concerted efforts of some State governments in this
respect, there is a strong likelihood of demand
emanating from these areas in future
The air traffic density can be measured by linking Urban
Per capita income with air passengers. Taking 1000
passengers per Million Urban Capita a recent study
has arrived at a comparative picture. Air traffic
density in India using this measure is very low at 72
as compared to China (282), which is 4 times higher;
Brazil (231), which is 3 times higher; Malaysia (1225)
is 17 times higher, U.S.A. (2896) is 40 times higher
and Sri Lanka (530), which is 7 times higher as
exhibited in Graph 6. This indicates the untapped
market potential given the projected burgeoning
young population and rising disposable income levels
in future.
? International Market Access
Open Sky Agreements between nations forge greater
competition in the International air travel segment.
Increasingly it is recognized that Nation States need
to evolve viable mechanism by which they all stand
to achieve trade gains and efficiency in international
market access in as far as Air traffic rights are
concerned. That is yet to happen. Five Indian Carriers
out of six have now started international operations.
It is therefore expected that such reforms in market
access arrangements as and when it happens will
potentially enhance traffic to and from India. Further,
deregulation of the international air traffic markets
would enable the LCCs to capitalize the opportunities
of newer markets first and enhance growth of
international traffic.
India’s impressive growth in international and domestic
trade over past few years has augured well for the
air-cargo industry in India. The entry of leading
private air-cargo companies has brought in a wave of
increasing automation, mechanization and process
improvement initiatives at major air-cargo terminals
in the country. Such investments in air-cargo
handling at key airports such as Delhi, Mumbai,
Bangalore, Hyderabad, etc. are expected to yield
higher air-cargo throughput and improved service
levels. The current share of air-cargo compared to
other modes of cargo-transportation is fairly low in
India.
The potential for air-cargo growth in India can be
gauged from the fact that some of the global airports
such as Hong Kong, Dubai and Incheon (Seoul) handle
more cargo volume than all Indian airports put
together. Trans-shipment at Indian airports is
currently negligible. Major bottlenecks are absence
of dedicated transshipment infrastructure at airports
and lack of clarity on the trans-shipment Customs
procedure
? Facts & figures
Indian aviation’s economic benefits
Air transport to, from and within India creates three
distinct types of economic benefit. Typically,
studies such as this focus on the „economic
footprint? of the industry, measured by its
contribution to GDP, jobs and tax revenues
generated by the sector and its supply chain. But
the economic value created by the industry is more
than that. The principal benefits are created for
the customer, the passenger or shipper, using the
air transport service. In addition, the connections
created between cities and markets represent an
important infrastructure asset that generates
benefits through enabling foreign direct
investment, business clusters, specialization and
other spill-over impacts on an economy?s
productive capacity.
. Aviation’s economic footprint
Contribution to Indian GDP
The aviation sector contributes INR 330 billion (0.5%)
to Indian GDP. This total comprises:
??INR 147 billion directly contributed through the
output of the aviation sector (airlines, airports and
ground services, aerospace);
??INR 107 billion indirectly contributed through the
aviation sector?s supply chain; and
??INR 77 billion contributed through the spending by
the employees of the aviation sector and its supply
chain.
??In addition there are INR 582 billion in „catalytic?
benefits through tourism, which raises the overall
contribution to INR 912 billion or 1.5% of GDP.
Major employer
The aviation sector supports 1.7 million jobs in India.
This total comprises:
??276,000 jobs directly supported by the aviation
sector;
??841,000 jobs indirectly supported through the
aviation sector?s supply chain; and
??605,000 jobs supported through the spending by
the employees of the aviation sector and its supply
chain.
??In addition there are a further 7.1 million people
employed through the catalytic (tourism) effects of
aviation.
High productivity jobs
The average air transport services employee
generates nearly INR 1.3 million in GVA annually,
which is around 10 times more productive than the
average in India.
Contribution to public finances
The aviation sector pays over INR 87.5 billion in tax
including income tax receipts from employees,
social security contributions and corporation tax
levied on profits. It is estimated that an additional
INR 9.8 billion of government revenue is raised via
the aviation sector’s supply chain and another INR
7.1 billion through taxation of the activities
supported by the spending of employees of both
the aviation sector and its supply chain.
? Consumer benefits for passengers and shippers
From visiting family and friends to shipping high
value products, 70 million passengers and 1.4
million tonnes of freight travelled to, from and
within India. More than 130,000 scheduled
international flights depart India annually, destined
for 70 airports in 50 countries. Domestically, more
than 664,000 flights make 89 million seats
available to passengers annually, destined to 73
airports.
Air passengers resident in India comprise
approximately 53 million of the passenger total.
For the 70 million passenger flights in total,
passengers pay INR 1,755 billion (inclusive of tax),
with Indian residents paying around INR 1,329
billion. This expenditure is likely to significantly
understate the value passengers actually attach to
the flights they use Calculations by Oxford
Economics suggest the value of the benefit to
travelers from flying, in excess of their
expenditure, is worth INR 1,100 billion a year (INR
832 billion for Indian residents).
Air transport is crucial for the distribution of high
value to weight products. Air freight may only
account for 0.5% of the tonnage of global trade
with the rest of the world, but in value terms it
makes up around 34.6% of the total.
Shippers pay airlines INR 165 billion annually to carry
1.4 million tones of freight to, from and within
India. The benefit to shippers, in excess of this
expenditure, is estimated as INR 69 billion. Based
on the share of exports in total merchandise trade,
Indian shippers receive around 45% of this benefit
(INR 31 billion).
? Enabling long-term economic growth
In 2010 there were 357 routes connecting major
Indian airports to urban agglomerations around the
world. On average there were 4 flights per day
along these routes. A total of 66 of these routes
were connecting India to cities of more than 10
million inhabitants, with an average of 7 flights per
day available to passengers. Frequencies are
higher to the most economically important
destinations. For example, passengers benefited
from 8 flights per day between Delhi and Dubai
International Airport, and from more than 59
flights per day from Delhi to Bombay, providing
high speed access for business and leisure
purposes throughout the day. Many of these citypair connections are only possible because of the
traffic density provided by hub airports. India?s
integration into the global air transport network
transforms the possibilities for the Indian economy
by:
??Opening up foreign markets to Indian exports;
??Lowering transport costs, particularly over long
distances, helping to increase competition because
suppliers can service a wider area and potentially
reduce average costs, through increased
economies of scale;
??Increasing the flexibility of labour supply, which
should enhance locative efficiency and bring down
the natural rate of unemployment;
??Encouraging Indian businesses to invest and
specialize in areas that play to the economy’s
strengths;
??Speeding the adoption of new business practices,
such as just-in-time-inventory management that
relies on quick and reliable delivery of essential
supplies;
??Raising productivity and hence the economy’s
long-run supply capacity. It is estimated that a 10%
improvement in connectivity relative to GDP would
see an INR 39.3 billion per annum increase in longrun GDP for the Indian economy.
? Consumer benefits for passengers and shippers
The aviation sector – comprising the airlines together
with the airports, air navigation and other
essential grounds services that make up the air
transport infrastructure – carries over 70 million
passengers1 and 1.4 million tones of air freight to,
from and within India. More than 130,000
scheduled international flights depart India
annually, destined for 70 airports in 50 countries.
Domestically, more than 664,000 flights make 89
million seats available to passengers annually,
destined to 73 airports2.
Among the many reasons that people and businesses
use air transport, people rely on it for holidays and
visiting friends and family; while businesses use air
transport for meeting clients and for the speedy
and reliable delivery of mail and goods often over
great distances. For this reason, the air transport
network has been called the Real World Wide
Web3.
The most important economic benefit generated by
air transport is the value generated for its
consumers, passengers and shippers. Passengers
spent INR 1,755 billion (inclusive of tax) on air
travel in 2009 and shippers spent INR 165 billion
on the transportation of air cargo4. With its speed,
reliability and reach there is no close alternative to
air transport for many of its customers. This means
that many are likely to value air services higher
than what might be suggested by their expenditure
on these services. But this economic value will vary
from flight to flight, and from consumer to
consumer, making it difficult to measure.
? Consumer benefits
The value of consumer benefit varies because as you
fly more often, the value you attach to each
additional flight will in general fall. As frequent
flyers know, the more they fly, the less excited
they get when they step on a plane. There comes a
point when the fare exceeds the value we place on
taking an additional flight, and we choose instead
to spend our money on other things. For this
reason the air fares that we are willing-to-pay do
not reflect the value we place on air transport so
much as the value we place on the last flight we
have flown. Much the same applies to the market
as a whole. Air fares reflect the value placed on the
service by the marginal passengers - those who
would forgo the flight were prices to rise - and not
the value that passengers as a whole place on air
transport services.
For this reason, valuing the consumer benefits for air
passengers and air freight shippers can not be
inferred simply from observed fares and shipping
charges. In addition to the fares paid, we need an
idea of how the passengers and shippers value air
transport other than at the margin. Unfortunately
there is no readily available data on this, and so we
must rely instead on judgment, informed by
economic theory, to guide us. Economics tells us
that the estimated benefits hinge on the sensitivity
of demand to changes in fares – the price elasticity
of demand. Estimates of prices elasticity’s are
available from previous research. Economic theory
also tells us that price elasticity’s will fall as we
move away from the margin, but it offers less
guidance on how much they may fall by. This
matters, because lower the price elasticity – the
less sensitive passengers are to a change in price –
the higher the consumer benefit. It follows that
taxation of air travel or cargo directly reduces the
economic benefit of all passengers and shippers,
as well as, at the margin, stopping a number of
people travelling and stopping a number of
shippers using air cargo services.
? Estimated consumer benefits
Given its sensitivity to our assumption about how
price elasticity’s vary, we have taken a very
conservative assumption that probably
understates the true benefits With this in mind,
we calculate that air passengers and shippers
valued the air transport services they used at over
INR 2,854 billion and INR 233 billion respectively.
Contained within these amounts, the consumer
benefits derived on top of that measured by
expenditure on travel and shipments were about
INR 1,100 billion for passengers and INR 69 billion
for shippers.
The total benefits accruing to passengers using the
Indian air transport system will include those
related to residents and non-residents as well as
passengers already being accounted for under the
benefits associated with the economy at the other
end of international routes. Some 53 million or 76%
of the 70 million passengers using air transport
services to, from and within India were Indian
residents. As for the share of freight shipped by
firms based in India, data is not readily available.
To give a broad indication we have used instead
the share of exports in total merchandise trade.
This is estimated to be 45% of the total trade in
goods in 20095. From this we estimate that, out of
the consumer benefits generated by Indian air
transport and on top of that measured by
expenditure, Indian citizens derived INR 832 billion
in value and Indian shippers around INR 31 billion
in value.
? How aviation enhances economic performance
Improvements in connectivity contribute to the
economic performance of the wider economy
through enhancing its overall level of productivity.
This improvement in productivity in firms outside
the aviation sector comes through two main
channels: through the effects on domestic firms of
increased access to foreign markets, and increased
foreign competition in the home market, and
through the free movement of investment capital
and workers between countries.
Improved connectivity gives Indian-based businesses
greater access to foreign markets, encouraging
exports, and at the same time increases
competition and choice in the home market from
foreign-based producers. In this way, improved
connectivity encourages firms to specialize in areas
where they possess a comparative advantage.
Where firms enjoy a comparative advantage,
international trade provides the opportunity to
better exploit economies of scale, driving down
their costs and prices and thereby benefiting
domestic consumers in the process. Opening
domestic markets to foreign competitors can also
be an important driver behind reducing unit
production costs, either by forcing domestic firms
to adopt best international practices in production
and management methods or by encouraging
innovation. Competition can also benefit domestic
customers by reducing the mark-up over cost that
firms charge their customers, especially where
domestic firms have hitherto enjoyed some shelter
from competition.
Improved connectivity can also enhance an
economy’s performance by making it easier for
firms to invest outside their home country, which is
known as foreign direct investment (FDI). Most
obviously, the link between connectivity and FDI
may come about because foreign investment
necessarily entails some movement of staff:
whether to transfer technical know-how or
management oversight. But increased connectivity
also allows firms to exploit the speed and
reliability of air transport to ship components
between plants in distant locations, without the
need to hold expensive stocks of inventory as a
buffer. Less tangibly, but possibly just as
important, improved connectivity may favor inward
investment as increased passenger traffic and
trade that accompanies improved connectivity can
lead to a more favorable environment for foreign
firms to operate in. Chart 2.2 plots the total value
of FDI built up in individual countries in relation to
their GDP against an index of connectivity
(produced by IATA), that measures the availability
of flights, weighted by the importance of each of
the destinations served. The chart shows that
countries with higher connectivity (measured
relative to their GDP), are in general more
successful at attracting foreign direct investment.
This is emphasized by the upward sloping line that
confirms the statistical relationship between
greater connectivity and greater FDI.
? Connectivity and long-term growth
A thought experiment considering the impact on
trade from eliminating the air transport network
suggests the economic benefit of connectivity is
substantial. Moreover, the experience of
businesses in Europe during the volcanic ashinduced airspace closures of 2010, as just-in-time
supply chains failed, provides a more concrete
illustration of how dependent modern economies
are on their air transport infrastructures.
A number of recent studies have attempted to
quantify the long-term impact on a country’s GDP
that results from an improvement in connectivity.
Measuring connectivity is not straightforward.
shows one measure of Indian connectivity,
compared to other economies Given that the
supply-side benefits of connectivity come through
promoting international trade and inward
investment, any impact is likely to manifest itself
gradually over time. This protracted adjustment
makes it very challenging to disentangle the
contribution that improved connectivity has had on
long-term growth, from the many of other factors
that affect an economy’s performance. This issue is
reflected in the wide range of estimates that
studies have reached for connectivity’s impact on
long-run growth. Three studies undertaken in 2005
and 2006 provide estimates of the impact that
connectivity can have on long-run level of
productivity (and hence GDP). The mechanisms
through which connectivity generates this
economic benefit are those described in Section
2.2. These studies suggest that a 10% increase in
connectivity (relative to GDP) will raise the level of
productivity in the economy by a little under 0.5%
in the long run, with there being a fair degree of
uncertainty around this average estimate11. A
much wider 2006 study, based on a cross-country
statistical analysis of connectivity and productivity,
derived a lower estimate of 0.07% for the elasticity
between connectivity and long-run productivity12.
? Economic footprint
Sections 1 and 2 have looked at the benefits of air
transport services for its customers, and the
longer-term benefits that come through increasing
long-term growth in the economy as a whole. In
this section we turn to the domestic resources that
the aviation sector currently deploys to deliver its
services, together with the domestic goods and
services consumed by the workers who depend on
the sector for their employment. We call the value
added and jobs supported by this economic activity
the aviation sector?s „economic footprint?.
The resources deployed by the aviation sector are
measured by its Gross Value Added (GVA). GVA is
calculated either as the output created by the
sector less the cost of purchased inputs (net
output measure), or by the sum of profits and
wages (before tax) generated from the sector’s
economic activity (income measure). The two
approaches are equivalent. Using either approach,
by adding the GVA of all firms in the economy, one
derives an estimate for the economy’s overall
output (GDP) We refer to this as the sector’s direct
contribution to GDP.
From this direct contribution, the sector’s economic
footprint is calculated by adding to it the output
(and jobs) supported through two other channels,
which we refer to as the indirect and the induced
contributions. The indirect contribution measures
the resources deployed by the aviation sector
through using domestically produced goods and
services produced by other firms – i.e. the
resources used through its supply chain. The GVA
generated through the indirect and direct channels
supports jobs both in the aviation sector and in its
supply chain. The workers whose employment
depends on this activity in turn spend their wages
on goods and services. The induced contribution is
the value of the domestic goods and services
purchased by this workforce. Taken together, these
three channels give the aviation sector?s economic
footprint in terms of GVA and jobs.
The aviation sector contributes to the economy in
two other ways. Through the taxes levied on GVA
(recall that it is equal to the sum of profits and
wages), the aviation sector supports the public
finances, and the public services that depend on
them. Second, through its investment and its use
of advanced technology, the aviation sector
generates more GVA per employee than the
economy as a whole, raising the overall
productivity of the economy.
? Tax contribution
Aviation makes a substantial contribution to the
public finances. In this section we estimate the
corporation tax paid by aviation companies, the
income tax paid by their employees, social security
payments (both employer and employee
contributions), and the revenue collected through
aviation taxes. These estimates reflect the direct
tax payments of the aviation sector. We also
provide an indication of the taxes paid by the
aviation sector’s supply chain and taxes raised
through induced spending channels. They do not
include increases in the overall Indian tax base
driven by aviation’s contribution to investment and
productivity growth in the wider economy.
? Aviation makes a substantial contribution to
Indian tax
The aviation sector contributed over INR 87.5 billion
in taxes through corporation tax and the income
and social security contributions (both employee
and employer contributions). This contribution is
likely to increase further, as the sector recovers
following a number of difficult years where many
firms suffered losses. Very indicatively, it is
estimated that a further INR 16.9 billion of
government revenue is raised via taxation through
the indirect (INR 9.8 billion) and induced (INR 7.1
billion) channels. Not included in the table above
are domestic aviation fuel taxes estimated to be in
the range of INR 15-20 billion.
? Investment and productivity
Apart from these transformative effects on the wider
economy, air transport services – the airlines,
airports and ancillary services, such as air traffic
control – form a capital intensive sector that
invests heavily in aircraft systems and other
advanced technology.
Catalytic effects
? Benefits to Indian tourism
Air transport lies at the heart of global business and
tourism. Through its speed, convenience and
affordability, air transport has expanded the
possiblities of world travel for tourists and
business travellers alike, allowing an ever greater
number of people to experience diversity of
geography, climate, culture and markets.
Tourism, both for business and leisure purposes,
makes a large contribution to the Indian economy,
with foreign visitors spending just over INR 548
billion in the Indian economy each year18. Around
89% of these visitors arrive by air so that foreign
visitors who travel by air spend approximately INR
488 billion.19
? Benefits to Indian trade
Compared to other modes of transport, air freight is
fast and reliable over great distances. However,
these benefits come with a cost attached.
Consequently, it is mostly used to deliver goods
that are light, compact, perishable and that have a
high unit value.
These key characteristics of air freight are most
apparent in the data on the modes of transport
used in world trade. For example, data on the
weight (volume) and value of goods carried by air,
sea and land transport is available for global trade.
While air accounts for just 0.5% of the tonnage of
global trade (Chart 3.6), air freight makes up
34.6% of the value of global trade.
? Conclusion
This study has described and quantified a number of
channels through which aviation in India generates
important economic benefits for its customers and
the wider Indian economy.
Studies of this kind usually focus on the „economic
footprint? of the industry, the GDP and jobs
supported by the industry and its supply chain. We
provide the latest estimates for these metrics. But
the economic value created by the industry is more
than that. It is not just jobs that are threatened if
government policies are badly designed. The
welfare of voting citizens and the effectiveness of
infrastructure critical to the country’s long-term
success in global markets are also at risk.
The welfare of travelling citizens has been
conservatively quantified in this study. Not all
customers of airlines serving Indian airports are
Indian residents, but approximately 76% are. They
currently get an economic benefit estimated to be
worth INR 832 billion. Indicatively, 45% shippers
using air freight services are Indian companies.
Taxing air transport directly reduces the welfare of
these Indian residents and Indian businesses.
The study has also shown what a critical asset
India?s air transport network is, to business and
the wider economy. Connectivity between cities
and markets boosts productivity and provides a
key infrastructure on which modern globalized
businesses depend. Many of these city-pair
connections are dependent on hub airports
through which to generate the traffic density
necessary to sustain them. All airlines supplying
services at Indian airports contribute to generating
these wider economic benefits. These „supplyside? benefits are hard to measure but are easily
illustrated by the experience of the volcanic ash
cloud, which closed much of European airspace for
a week in early 2010. Travellers were stranded.
Globalized supply chains and just-in-time
manufacturing processes came to a halt.
More readily measured is the „economic footprint?
supported, mostly, by the activities of national
airlines. Indian-based airlines were responsible for
carrying 71% of passengers and 78% of freight.
The wages, profits and tax revenues created by
these airlines flows through the Indian economy,
generating multiplier effects on Indian national
income or GDP. The economic benefits for India
created by non-Indian airlines are to be found in
customer welfare and in the part these airlines
play in providing the connectivity infrastructure
between India and overseas cities and markets.
Aviation has a significant footprint in the Indian
economy, supporting 0.5% of Indian GDP and
1,723,000 jobs or 0.4% of the Indian workforce.
Including the sector?s contribution to the tourism
industry, these figures rise to 1.5% of Indian GDP
and 8.8 million jobs, or 1.8% of the workforce.
Also significant is the fact that these are high
productivity jobs. The annual value added (or GVA)
by each employee in air transport services in India
is INR 1.3 million, approximately 10 times higher
than the Indian average of INR 127,000.
Tax revenues from aviation are substantial. Indianbased aviation companies paid INR 87.5 billion
annually in direct taxes and social security
payments. It is estimated that an additional INR
9.8 billion of government revenue is raised via the
aviation sector?s supply chain and INR 7.1 billion
through taxation of the activities supported by the
spending of employees of both the aviation sector
and its supply chain.
All together these points demonstrate that aviation
provides significant economic benefits to the
Indian economy and its citizens, some of which are
unique and essential to the operation of modern
economies.
Bibliography
? Indian Institute of Foreign Trade, Delhi
? Aerospace, India
? Indian Aviation Industry
? Investing Across Borders 2010
? National Transport Development Policy
Committee
? Report of working group on civil aviation sector
? Department of Industrial policy and promotion
? Ministry of commerce and industry
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