Regional aviation is generally regarded as the segment of the Indian airline industry that offers immense potential for growth in the long term. It is not without reason therefore that there was a distinct focus on this segment of the industry in the National Civil Aviation Policy 2016 (NCAP 2016) unveiled on June 15 this year by the Ministry of Civil Aviation (MoCA). An important component of the NCAP 2016 is what is termed as the Regional Connectivity Scheme (RCS) which is aimed at providing air services to unserved and underserved airports of the country through revival of existing air-strips and airports retaining these in the no-frills category.

On Friday July 1, 2016, the MoCA has placed in public domain, a draft document on this scheme and has invited feedback from all stakeholders by July 22. Currently, air traffic is concentrated largely between the metros and a few other large cities. At present, there are 394 unserved and 16 underserved airports in the country. The MoCA is of the view that of these airports, 30 can be made operational without any additional investment and regional flights can commence operations immediately.

In addition, the government has made budgetary allocation for the development of another 60 airports under the RCS in the initial phase. This scheme is expected to provide the much needed impetus for the growth of airport infrastructure in the remote as well as those areas of the country that are not easily accessible by road. This will certainly provide a boost to regional aviation which in turn will fuel economic growth especially of the hinterland. The government expects the RCS to show results in just 12 to 15 months after its implementation.

The government aims to achieve this firstly by making operations to regional airports commercially attractive for regional airlines. This is proposed to be achieved by providing attractive financial incentives to regional carriers through a system called Viability Gap Funding (VGF) to compensate for losses suffered by them. Resources for VGF will be raised through imposition of a levy on tickets for flights on nonregional routes. This should provide sufficient incentive for airlines to operate flights to regional airports which for them may not be adequately remunerative. In addition, there are provisions for other financial concessions by both the central and state governments such as service charge exemptions, waiver of airport charges and reduction of value added tax (VAT) to less than one per cent on aviation turbine fuel (ATF). The state government would be required to provide fire services free of cost as also electricity, water and other utilities at the regional airports at substantially reduced rates. They will also be required to provide good road connectivity from different parts of the city to the local airport. All these will contribute to substantial reduction in operating costs for the airlines and the airports.

The government also aims to make flying from regional airports easily accessible as well as affordable for large segments of society in Tier-II, Tier-III and Tier-IV cities and towns that have not had the opportunity to avail of this facility so far. This has been attempted by capping air fares. Passengers flying from an airport which takes less than 30 minutes to reach the destination, will have to pay a fare of just Rs. 1,200. For a flight of 60 minutes, the maximum airfare will be limited to Rs. 2,500.

As per Dr Mahesh Sharma, Minister of State for Civil Aviation, the launch of RCS is an integral step in achieving the objectives of the NCAP 2016 of enhancing passenger traffic in the domestic segment to 30 crore by 2022 and to 50 crore by 2027. The RCS is likely to a give a major fillip to tourism and employment generation in Tier-II, Tier-III and Tier-IV cities. Through introduction of helicopters and small aircraft, it is also likely to significantly reduce travel time in remote and hilly regions, as well as island territories and other areas of the country afflicted with insurgency and other security issues.

To facilitate the RCS, the government has taken steps to make it easier for airlines by permitting them to import aircraft that are up to 18 years in age. This will inspire new players to foray into the airline industry as the initial investment will be low. All these measures will bring in a multiplier effect in the growth of air travel.

The Uncertainties

On the face of it, the scheme appears well crafted and is expected to prove to be a bonanza for the Indian airline industry. However, there may be impediments that could make it difficult if not impossible, for the MoCA to achieve the objectives of RCS as envisaged. While this scheme is regarded by analysts as bold and innovative that is expected to boost the growth of air traffic and consequently benefit both the regional carriers and large segments of the Indian society, it will unfortunately impose a burden by way of higher fares for air passengers flying on non-regional routes. This is seen as somewhat unfair.

THE LIABILITY OF RAISING FUNDS FOR VGF IS REQUIRED TO BE SHARED BETWEEN THE CENTRAL AND STATE GOVERNMENTS IN THE RATIO OF 80:20

In some ways, the RCS will impose new financial burden for regional carriers as well. Airlines seeking to use nonoperational airports, which require substantial investment for revival, in addition to Rs. 50 lakh that they are required to submit as bank guarantee for every route, they will have to provide a bank guarantee of an additional Rs. 1 crore to the government. Even though this additional commitment by the airlines is limited to a duration of one year, the industry regards the added financial burden as inordinately high.

But most importantly, as this scheme calls for close cooperation with the governments of the states in which the regional airports are located, much will depend on whether the states would come forward to bear the burden of the tax breaks and other incentives to make the scheme a success. The liability of raising funds for VGF is required to be shared between the central and state governments in the ratio of 80:20. Also, the states involved in RCS should be willing to reduce VAT on jet fuel to one per cent or less. Currently, only West Bengal and Andhra Pradesh impose VAT on ATF of one per cent or less. Other states charge much higher rates, some as high as 30 per cent. It may be difficult for these states to willingly and easily accept loss of revenue. Suggestion by the Ministry of Civil Aviation to the states to cut VAT to four per cent has yet not drawn any favourable response from most of them. For the point of view of the states, any reduction in VAT will lower tax revenue for them. A report by GMR Group, which operates the Hyderabad airport, indicates that VAT at 16 per cent charged by the Telangana Government brought in a revenue of Rs. 150 crore in financial year 2014. If VAT is reduced to four per cent, the loss to the state government will be to the tune of Rs. 110 crore.

It is clear that the role played by the state governments will be critical to the success of RCS. To get all states affected by the new policy on board to make the scheme a success could prove to be a daunting challenge especially in the prevailing political climate in the country.