A Nuanced Approach: Budget 2021 And Indian Aviation  

A Nuanced Approach: Budget 2021 And Indian Aviation  

by Satyendra Pandey - Feb 4, 2021 05:06 PM +05:30 IST
A Nuanced Approach: Budget 2021 And Indian Aviation  Flight climbing in the sky (Karen Arnold - public domain pictures)
  • The budget has taken a nuanced view on aviation, but how this translates to on-ground implementation remains to be seen.

Monday, 1 February saw the announcement of the Union Budget for the upcoming financial year. Aviation stakeholders watched with baited breath. This is because budgetary allocations signal intent and by extension what the industry should expect, going forward.

Given the Covid pandemic that decimated demand across the aviation value chain, there was anticipation and trepidation in equal measure. As far as aviation is concerned, at first glance, it seemed nothing has changed. However, a closer look suggests that the budget has taken a fairly nuanced approach.

Given that each budget is contextual, Budget 2021 was prepared in an environment where the country is emerging from a once-in-a-century pandemic coupled with a paradigm shift in how India positions itself to lead in Asia.

Instead of disinvestment, the word privatisation was used. In the context of airports operations and management, contracts featured instead of the develop-build-operate-transfer models.

With regard to aircraft financing, a tax holiday for capital gains for aircraft leasing companies and an exemption on lease rentals paid was proposed for setting up entities that are a unit of the International Financial Services Centre (IFSC).

The intent is clearly to encourage foreign lessors to relocate a part of their operations to India and, more importantly, stem the forex outflows.

Equally important to aviation was the mention of infrastructure and infrastructure financing. Aviation projects ­­ — mainly airports — have faced a huge challenge in raising finances, and over the last year this has only deteriorated.

The proposal to set up a development finance institution (DFI) capitalised with Rs 20,000 crore and with the ability to lend up to Rs 5 lakh crore will certainly help airport maintenance, repair, and overhaul development, and perhaps even aircraft manufacturing.

Similarly, facilitating the funding of infrastructure by issuance of zero coupon bonds is also likely to lead to additional avenues for aviation financing. However, these are not likely to materialise in the immediate term — rather will take a few years.

Delving into the immediate allocations, Budget 2021 earmarked Rs 3,224 crore for aviation. Much of this was the regular allocation. Nothing new was included.

Almost no money was allocated for the turnaround plan of Air India making the government’s stance on privatisation very clear. The regional connectivity scheme (popularly known as the Ude Desk Ka Aaam Nagarik or UDAN scheme) saw an allocation of Rs 600 crore – much of this for the revival of 50 airports and for viability gap funding for flights to the North East.

Air India’s special purpose vehicle — that was established to halve the debt burden of the carrier — saw an allocation of Rs 2,268.99 crore to service the debt. The airports regulator got Rs 10 crore while the Indira Gandhi Rashtriya Udan Academy got Rs 7.33 crore — mostly Capex spending.

Interestingly, the government also indicated that Air India and the Airports Authority of India (AAI) may resort to internal and external budgetary resources of Rs 9,266 crore for continuing operations.

Air India is already in the market for loans that are to be collateralised against aircraft; the AAI may also have to put up collateral to raise funds.

In this sense, it helps leverage the assets of the tax-payer rather than routine grants to these entities. Going by the adage that ‘debt disciplines the manager’, it presumably will force prioritisation on payments and a relook at the amounts being raised.

The budget was silent on the long-standing demands of the industry to rationalise taxation on aviation turbine fuel and that of giving aviation infrastructure status. This was not surprising given that both demand a far more complex exercise of aligning several stakeholders and a signal of this could even backfire in the current context.

Overall, the budget has taken a nuanced view on aviation. How this translates to on-ground implementation remains to be seen.

Satyendra Pandey is an India market expert and has held a variety of roles across aviation. He is also an author and a certified pilot. His most recent book is titled: Dissonant dispatches: Indian aviation’s emergent flightpath.

Satyendra Pandey is an India market expert and has held a variety of roles within the aviation business. His positions include working as the Head of Strategy & Planning at Go Airlines (India) and with CAPA (Centre for Aviation) where he led the Advisory and Research teams. He is also a certified pilot with an instrument rating.

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