Last month, a relative of mine returned from the UK after five long years. When I asked him what he felt coming back to India, he gave an interesting reply. He said that it felt like travelling in a tram after a bullet train ride. Life had slowed down all of a sudden. Transportation, in particular, was painfully slow.
In the course of our conversation, he asked me whether we still considered aviation as a luxury or as an essential commodity. This question got me thinking and it remained in my mind even after our conversation ended. As a researcher, I turned to numbers for answers.
Only 1% of travelling population takes the aerial route. The reasons include higher prices, lack of access to airports and limited connectivity via airways.
In India, aviation is still a distant dream for 99.5% of our population--only 1% of travelling population takes the aerial route. The reasons include higher prices, lack of access to airports and limited connectivity via airways.
However, India is expected to be the third largest aviation market in the world by 2020, and the largest by 2030. Our relatively large share of young population and their rising purchasing power has made India the fastest growing aviation market in the world.
Until last year, the aviation industry had been growing unprofitably, Indigo being the only airline registering profits consistently. However, the falling oil prices which resulted in a decline of Aviation Turbine Fuel (ATF) have propelled airlines in a different direction in the past year.
Still, airlines in India continue to pay a higher tax on ATF compared to those worldwide. The ATF accounts for more than 40% of total operating costs, and its cost in India is 40 to 45% higher than the international costs because of this high taxation. Furthermore, the fuel is currently supplied by Indian oil companies which are state monopolies and the ambiguity in the pricing mechanism enables them to exploit it to their benefit.
Why is the government insistent on keeping air travel expensive? To put it more directly, what is the rationale behind the high taxes on ATF?
This raises an important question. Why is the government insistent on keeping air travel expensive? To put it more directly, what is the rationale behind the high taxes on ATF?
One major underlying reason could be that the government still considers aviation as a luxurious commodity. Another reason could be that it doesn't want the state-owned enterprises -- such as the railways and oil companies -- to be affected.
Today, travelling in a second AC train would cost almost the same as travelling in a budget airplane in long-distance routes (say, requiring more than a day's travel). For instance, the cost of tickets from Hyderabad to Delhi by flight (booked in advance) is comparable to the ticket rate in a second AC train.
It must be noted that the ticket fare of sleeper and AC compartments are subsidized by taxpayers' money. All passenger services except AC third tier registered losses as per a CAG report. The net loss on working a passenger train for one kilometre was estimated to be ₹138.75 in 2007-08.
If the tax on ATF is made lower for long-distance routes, air travel would become cheaper than trains.
Opportunity costs and loss of productivity incurred by the travellers due to greater travel time requirement (compared to airlines) are, perhaps, intangible losses. These indicate that the actual cost of travel by train is likely to be higher or comparable to airlines in longer routes.
It is, therefore, important to evaluate whether we need railways in all long-distance routes when the option of travelling by air is available.
Airlines could be a much better option when compared to railways in long-distance routes. For this, the costs must be brought down. Bringing ATF under Goods and Services Tax (GST) and rationalizing the tax can be a good beginning.
The government may also incentivize air travel in long-distance routes. To reduce air travel fare in such routes, the tax structure could be altered such that the tax imposed is inversely proportional to the distance. Since ATF largely determines air travel fare, if the tax on ATF is made lower for long-distance routes, air travel would become cheaper than trains.
Railways can shift its focus to short-distance routes. This is likely to improve the efficiency and punctuality of trains as well. Long-distance trains are generally delayed more than short-distance ones. Railways should also be able to achieve better route optimization in short-distance trains. This should also improve the profitability of the railways.
Policymakers would do well to treat aviation like an essential commodity -- at least in the long-distance routes.
Under this model, people can still travel long-distance routes by train if they wish to. The only difference would be that they may have to change two or three trains to reach their destination (similar to bus travel).
If Indian Railways focuses on short-distance travel and if air travel is incentivized for long-distance routes, this is also likely to increase the profitability of the aviation industry. This would attract more players to the market leading to competition and prices will reduce even further.
One major challenge for implementing this would be the airport infrastructure, which as it stands may reel under increased traffic.
At present, we have one airport for every 4.6 million members of our population, which is one of the lowest airport densities in the world. It is imperative to have a much better airport density for a better and faster connectivity with Tier II and Tier III cities.
There is little doubt that speed has become synonymous with productivity and socio-economic development. The faster the travel, the better it will be. In light of this need for speed and in view of the vastness of our country, policymakers would do well to treat aviation like an essential commodity -- at least in the long-distance routes. Once this shift in perspective sinks in, reforms will automatically sprout by themselves.
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