The aviation industry in India is one of the biggest industries in the world after the United States (“US”) and China. It is projected by International Air Transport (IATA) that in the next ten years India shall overtake China and the US in the aviation industry. Previously, this sector was considered to be an excessively regulated sector, but now the scenario has been a bit different as it has now become a more liberal and investment-friendly sector in India with the policymakers immensely interested in building suitable mechanisms to effectively promote air transport across the country.
National Aviation Policy
India has seen rapid growth in the civil aviation industry. In June 2016, the Government of India (“GOI”) introducedthe National Aviation Policy(“NCAP”), wherethe Regional Connectivity Scheme(“RCS / Scheme”) also known as UDAN (Udega Desh Ka Aam Nagrik) Scheme is one of the most crucial objectives of NCAP. RCS aims at affordable travelling for the masses, promoting tourism, increasing employment opportunities and promoting balanced regional economic growth. RCS will cease to operate after ten years of its operation.
Subsidies for almost half of the seats on every flight would cost roughly INR 2500/- under the new program. Under this Scheme, airlines on the designated routes will get subsidies and additional privileges, such as a three-year monopoly on the route and other concessions at the enroute airports. 27 already serviced airports, 12 underserved airports and 31 unserved airports will be linked via RCS proposals in the first phase of the program. It is expected that the GOI shall play an important role as a facilitator under the scheme. RCS aims at improving regional connections, expanding the entire aviation business with better connectivity and cater to the country’s economic growth. GOI and state government/union territories shall provide the following to promote RCS-
- Subsidy such as viability gap funding (“VGF”) for participating airlines.
- For the next ten years, the GST will be reduced to 1%, wherein now the GST is 5% and 12% for economy class and business class respectively.
- Coordination with oil firms to make refueling stations more convenient with regard to clearances.
- Clearances and permissions for land to develop the airport.
- VGF accounts for 80% and 20% for the GOI and the state government respectively.
- Concessions will be provided by airport operators, such as the Airport Authority of India (“AAI”)
Key Features of the RCS Scheme
Some of the most salient characteristics of the RCS plan include–
- Airports and airstrips in remote locations or small tier III or IV cities that have been neglected and underserved should resurrect.
- Boosting connection through giving low-cost flights to individuals.
- Promoting tourism, increasing scope of employment and businesses.
- Increasing the accessibility and cost of regional air travel.
- It is the goal of RCS to help airline operators by providing financial assistance i.e. VGF. Also, to cover any discrepancy in airline operating costs against predicted revenue on the routes, if any.
Impact on Stakeholders
- This will help the tourism industry to grow since it will make it easier for businesses to expand into new markets and provide lower fares to customers.
- No costs will be assessed by the airport operators for landing and parking charges and terminal navigation fees.
- Passengers travelling on lucrative routes will be charged a 2% cess by the government, which will have an impact on travelling on the regular routes.
Tourism and RCS Scheme
With the changing global landscape, tourism has become one of the most important areas with several prospects which are attracting the attention of the policymakers in India in recent years. However, owing to the lack of air connectivity, the tourism culture in India is getting affected and other tourist destinations are in a similar predicament. Agra, Shillong, Puducherry, Jaisalmer, Porbandar, Diu, Gwalior, Kullu, Pantnagar and Mysuru are among the important tourist spots that will now be linked under the RCS. This will enhance both domestic and inbound tourism and will greatly assist tier-II towns in providing inexpensive flight tickets to the general public.
Connectivity is the most pressing challenge for the Northeast, and as a result, the economic growth of this region has been stalled. Though greater rail and road networks are vital for transportation, in this regard the regional air connection is even more important. Aside from the needs of local economic growth, notably in the tourist sector, air travel is critical because this location is an active seismic zone, air travel is also required for this group of states. This area is also prone to natural catastrophes, and in the case of such disasters, road and rail networks are unable to withstand the effects for long. The Indian Government’s “Act East” program, which seeks to increase commercial linkages between the area and South-East Asian countries, would benefit greatly from the RCS. In the second phase of the RCS plan, 92 new routes will be launched in the Northeast which will improve air connectivity. Improved Connections will have a significant impact on the tourism industry, as tourists will benefit from the convenience which improved connectivity would deliver.
Taking Cues from Foreign Commercial Aviation Models
India has a history of adopting means of rapid and dynamic metamorphosis from other nations. Right from the Liberalization Policy in 1991 which culminated as the single largest revival strategy policy in the nation’s history, the pathway to achieving rapid modernization in the aviation sector can flow from developing a progressive and derivative approach. Going by statistics, India is the third-largest market for aviation companies to invest in, in terms of passenger traffic added in the year 2021- as estimated at 115 million. Despite being a gigantic player in the international aviation market, India still has a lot to imbibe from other small, yet significant entities that are showcasing a role-model run for others. Taking the example ofDubai which has a heavy tourism-driven economy has also undergone a revamp of its existing aviation model to suit the ever-changing needs of its economy. Till 2019, the aviation sector in Dubai accounted for 28% of the nation’s GDP, along with employing 22% of its labour force. There were more than 150 airlines that were operating directly out of Dubai International Airport, all due to the ‘open sky’ policy of the government, which was initially perceived to threaten the local airlines, but eventually resulted in a more efficient regulation of the aviation market as a result of the competitive spirit induced by foreign entrants, who found the robust infrastructure as well as competitive operations fee of the country as an ideal investment hotspot. The Investment Corporation of Dubai (“ICD”) is the key state-owned enterprise that undertakes to channelize funds and investments towards essential infrastructure projects as aviation being a major one of the significant areas. Emirates, the state-owned airline of Dubai, is owned and operated by ICD. One of the major benefits of running Emirates through the holding of ICD is that foreign investments do not seek much taxation and regulatory issues as compared to other wholly state-owned enterprises. In addition to this, it also gives Emirates a push to perform better in the global aviation market. Another striking feature about Emirates is that it does not rely on government subsidies, rather it operates its own commercial operations and has been able to fare reasonably. However, in the past few decades, it has been able to maintain enough surplus to invest in its flight operations, apart from repaying its debts without government intervention.
Some key takeaways that can be seen as a welcome move for the Indian aviation sector to implement in the RCS or any other future scheme that can be introduced by the government in the subsequent years are –
Imitatingthe ICD model, the institution of a private-funded, yet majorly government-held subsidy to oversee the operations of some prominent airlines in the country would help usher in innovation and competitiveness in the airlines market, enabling them to perform on a global level with a much better output as well as ease pressure on the Government from solely upkeeping with the Aviation industry.
Tapping into the strategic location of India can do wonders for the aviation economy. Dubai is a centrally located city nation, situated at the confluence of east European and Asian nations, and hence its capabilities to attract foreign tourism and business traffic is immense. Similarly, India is ideally placed on the South-East Asian trade belt, a hotspot for global merchant and tourist opportunities. Nurturing the aviation sector would eventually mean opening doors for inward global opportunities that are immense in this financially and geographically endowed region, enabling a competitive environment for foreign players to enter the market. Dubai has over 150 commercial airlines operating out of its handful of airports, while India has only about 40. Inviting foreign players would boost the efficiency of the current services offered by the airlines, level out the existing monopolistic practices adopted by a few big players in the markets and also offer more choices to the passengers.
Challenges to RCS
The Scheme has a vast potential to transform the Indian Aviation sector in multiple aspects. The Government-backed schemes, along with the PPP model of building and maintaining infrastructure would make channeling funds a more viable and reasonably sound method of pursuing the RCS. Even though the Scheme provides substantial opportunities for the future of the aviation sector in India, certaininherent challenges can still stifle its potential. Some patent hindrances which come in the course of effective implementation of this scheme are discussed below –
- Availability of adequate infrastructure– The dearth of quality infrastructure required for the program stands as a primary concern. For this reason, the sound infrastructure of private airports in major metropolitan areas is critical. As the primary goal of this plan is to link more and more regions of India, it has difficulties in connecting the country with the rest of the globe. It will become more difficult to find time slots, as the globe is becoming more and more interconnected. There is also a huge problem with keeping visitors safe, owing to the fear of insurgents. Fundraising for the VGF is another significant obstacle. Another issue is a lack of available land, as airports take up a lot of space, making the land acquisition process a challenge.
- Public Outreach– The biggest challenge that this Scheme faces is getting the word out to the general public. Only a small percentage of individuals are aware of the program and are able to take advantage of it. Third-party programs are also making use of this advantage to carry out fraudulent actions. According to an examination by Outlook, in the first two stages of RCS routes, the success rate seems to be less than 20 per cent. RCS allocated 440 air routes to 14 big airlines, but only 40 to 60 of those flights are really in use.
- High airfares on the non-RCS routes– Since the VGF would be collected as a levy from passengers, it would create a burden of spending more on air tickets for passengers traveling on non-RCS routes. Additionally, the operators themselves would be averse to operate on the non-RCS routes since it would invariably push up the cost of operations, which they would be forced to recover from the fliers.
- Susceptibility to high operational risk– The rise in the number of regional, short-distance air routes would result in the issue of air safety, leading to a large number of air hazards, the most prominent one of them being a potential risk of mid-air collisions. There shall be absolutely no room for compromise on this extremely essential aspect of the aviation industry.
- Vulnerability of the advantages of financed charges to the average person– Passengers are qualified for financed charges on first-started things out served premise. Whether a regular everyday person would benefit from this plan will be a concern to thoroughly consider. The airfare cap on the RCS seats is for half of the airplane ability to a limit of 40 seats. The cap is INR 2500/hour, yet no course of deciding RCS seats has been affirmed. Furthermore, the latest possible moment appointments will nearly be non-RCS when they are a decent amount of “earnest” travel, in particular clinical travel which will probably raise grumblings.
- Post-commencement ambiguities– The sustainability of operations is one of the vital core values for RCS. The Ministry of Civil Aviation perceives that traffic interest on RCS routes will be uncertain, and with the greater part of such courses being untested/non-functional, the market hazard for selected airline operators could be significant. Such market hazard would more often not be elevated by virtue of conceivable rivalry from other aircraft administrators – particularly in the beginning phases of course improvement. Such contests in the beginning phases of improvement of such courses, particularly given the interest vulnerability, could ultimately affect the accomplishment of the planned goals.
- Need for providing State-funded utilities– The state legislatures are required to give charge endowments to provincial tasks, just as security and fire benefits, other than giving power, water and other utility administrations at concessional rates. Each state needs to give consent to the requirements of the abovementioned facilities and it may not be as easy as the provisions have imagined it to be. Also, a few of the air terminals need recovery, and this is a long-term process (given the idea of air terminal improvement in India). Consequently, it is essential to level the interests, all things considered, while forming air terminal preparation and administrative strategies.
- Lessons from past precedents– The aviation sector, in the past decade, has witnessed the failure of several domestic and national airline companies. The airline business has been dominated by low and ultra-low-cost carriers, which operate on thin profit margins. Under this Scheme, these companies will be required to deliver and operate on underserved and unserved air routes. Low volumes of passenger traffic on these routes may amass financial difficulties for the entities, deepening their concern for the viability of their business operations.
- Scarcity of Skilled Labour– Under the Scheme, an expansion of the airline network into the interior pockets of the country has been envisioned. To operate these domestic airports, a well trained and equipped workforce will be required. Although there is no dearth of skilled labour in the metropolitan areas, the availability of the same will be a concern in the tier-II and tier-III cities. Government initiatives of providing industry-focused skilled labour have been under slow progress and thus, there may be a demand-supply imbalance moving forward. The availability of pilots is one of the difficulties this plan confronts.
- Ramping up of aviation infrastructure, a prerequisite– For the Scheme to be executed to its full potential, there has to be a significant investment in the airport infrastructure and space. While the government has been able to incorporate various infrastructure financing models to tackle the issue, the capital-intensive nature of the scheme still possesses great concern.
- Sustainability of Operations– The Government has been actively pursuing the de-carbonisation commitments made, to make the country’s economic activities more sustainable. The airline industry has a high carbon footprint and thus, its large-scale promotion acts contrary to the stand of the government. The promotion of other alternative mediums of transport having a comparatively lower carbon intensity can be a more suitable approach. With the advent of technologies like hyperloop and maglev trains, the promotion of conventional fossil fuel-based transport infrastructure may pose a challenge to the authorities.
Even though the RCS is faced with several challenges, the government is determined to push forward the scheme, tackling all the concerns. The government has taken several steps, including:
- Upskilling programs– The GOI has embraced some of the skill-building exercises to fulfill the demand for aviation-specific labor requirements as a result of the Scheme.
- Financing Models– The Government has considered inculcating several PPP models to provide the required funds to enable the development of airport infrastructures under the Scheme.
- Revival of the aviation sector in the post-pandemic economy– The Indian Aviation sector was one of the hardest hits by the COVID-19 pandemic and this was a phenomenon that was reflected around the globe. But as the strict regulations have been gradually lifted and the economy is opening up after the lockdown, the aviation sector is moving towards the growth trajectory. Thus, the aviation sector in the post-pandemic scenario is manifesting a strong revival, further fortifying the potential opportunities that can be capitalized under the RCS.
- Switching to greener fuels– Since cutting transit-induced carbon emissions is the primary concern for the Government, the airlines operating under the RCS can opt for greener, more sustainable biofuels, such as Jatropha biodiesel, as propellants for their aircraft. However, this seems like a very early strategy to incorporate in the present mechanism, it can be considered as a good alternative for the future of commercial airlines.
- Systematic withdrawal of VGF– The VGF scheme seeks to incentivize passengers to travel more frequently. Since the scheme will create liabilities for the state in terms of capital expenditure, the Government can plan to introduce the VGF scheme initially for a definite period of time and later withdraw the same, in a systematic manner, after the airlines have achieved sustainable profit margins in terms of the required passenger traffic.
- Upgrading the navigation and coordination mechanisms– The hazard of mid-air collisions can be mitigated by boosting the existing navigation and coordination infrastructure of existing and proposed airports. Since a significant portion of the aviation budget is spent on maintaining navigability and safety, the institution of the said measures and controls should not be much of concern under the scheme.
- Awareness Campaigns– Customer-awareness program, campaigns and advertisements can be launched by the government to spread awareness about the RCS among the general public. Since the Scheme acts in the public welfare domain and is meant for the benefit of the common flyers, the information about the same should necessarily be conveyed to the ones who can draw profit from it.
The GOI has established an influential program in RCS, which aims to fulfill the aspirations of the average man to fly. Local and regional connections will be benefited greatly from this Scheme. It will also result in a significant increase in employment to people at various levels of education and experience.
Even in 2022, one can deduce that aviation is still at a nascent stage, with a lot of upgradations to be done in the forthcoming years. Such schemes are an excellent means of expanding the market of new-age industries that are gaining prominence due to increasing per capita income and salary bands among the middle-class and lower-middle-class populations. Given the uncertainty in the financial climate over the past few years, the profitability quotient of these industries frequently come under a cloud and will remain so for an indefinite period of time. Careful and steady implementation of these kinds of Schemes is the only means of ensuring the long-term survival and sustenance of the aviation sector.
To realize the impact of the RCS on the aviation sector, a period of five-ten years will be required. The scheme has been brought in to fortify the fundamental infrastructure requirements and to enable the aviation sector to expand its scope. Increasing the nation-wide connectivity has been the primary focus of the Scheme and the same will certainly have a long-term positive influence on the economy if implemented in a systematic and phased manner. Innovation is the part and parcel of today’s ever-changing world, and the same needs to be adequately represented in the infrastructure projects which seek to reshape the future of the country from low-emission combustibles, to green-field aligned airports, cheaper and better ticketing facilities and more accessibility to the passengers, RCS can be seen as the progenitor of the new-age Indian aviation sector. GOI can take instances from similar kinds of schemes that aim at parallel objectives, and have been implemented in a highly proficient manner. Guzzling up capital should not be a striking feature of such schemes, rather than that effectuating their intended effect swiftly and cost-efficiently should be.
About the Authors
Mr. Avinash Das is an Advocate at Cyril Amarchand Mangaldas.
Akshit Gupta is a 4th Year Law Student from New Law College (NLC), Bharatiya Vidyapeeth University (BVPU), Pune.
CH Sriniwas is a 3rd Year Law Student from SVKM’s Kirit P Mehta School of Law, Mumbai, and a Junior Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Hamna Viriyam
Associate Editor: Akshit Gupta
Junior Editor: CH Sriniwas
Preferred Method of Citation
Avinash Das, Akshit Gupta and CH Sriniwas, “UDAN- The National Aviation Policy” (IJPIEL, 14 February 2022)