Fuel Populism killing air traffic
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Written By Devesh - 14 July, 2008
BIAL
Bangalore
Infrastructure
Aviation
Fuel populism killing air transportation
India, the world's largest democracy, has a sorry record in sound and bold economic administration. Populist measures abound, and nothing is sacred or immoral in the perpetual quest to obtain and then secure the "gaddi".
Fuel pricing in India is a prime example.
Officially, the "Administered Price Mechanism" was abolished in 2002, but today, the Indian government has a greater control on the fuel market and prices than ever before. Private operators have been driven out of the market, and only the Government owned companies survive.
Government have become addicted to their windfall fuel tax income. In the last 6 years, fuel tax collections have increased almost 250% to a staggering Rs. 170,000 Crores (Rs. 1.7 trillion or US$ 41 Billion).
Indian bureaucrats have learnt well from the Europeans and their "tax and spend" Keynesian economic models. Fuel taxes are greater than the cost of the fuel. In Bangalore, when we pay Rs. 57 for a litre of Petrol, Rs. 32 is taxes, only Rs. 25 is the cost of the actual fuel. Internationally, the cost High Speed Diesel ex-refinery (excluding taxes, duties, levies, etc), is marginally higher than Petrol. Yet, in India, Diesel costs 35% less than Petrol, thanks to lopsided tariffs and populist driven subsidies.
The one fuel that is truly free in pricing is Aviation Turbine Fuel (ATF). Thanks to the government induced haemorrhaging, and the traditional, but wrong view, of air travel being a luxury, oil companies are using deregulation on their favourite whipping boy -- ATF. In India, ATF costs double than prevailing international prices.
The results are plain to see. Despite being leaders in the global airline growth story, airlines in India, today, are bleeding, and bleeding bad. Losses in 2008-9 fiscal, are expected to cross $2 billion. Unable to sustain, in sheer desperation, airlines are hiking air fares, cutting back schedules, deferring aircraft deliveries, laying off staff, even considering importing their own fuel.......... in short, anything, to cut down losses.
This has resulted in air traffic crashing all across India. In Bangalore, the shining example of India's air traffic growth, from an annual growth rate of 33% year on year, for the first time since 2001, air traffic is actually falling to levels below that of the previous year.
Additionally, due to the remoteness of BIAL airport, regional air traffic is decimated, with air passengers switching to trains and buses instead. We might be tempted to say "so what". But we overlook the productivity aspects in the slower transit time of trains and buses. And in today's globally competitive economy, productivity matters.....a lot.
The operators of the Bengaluru International Airport, BIAL, now face an additional quandary. The airport terminal is reportedly, under capacity, and needs immediate expansion. Till now, their primary source of revenue, has been landing charges levied on flights. Thanks to a reduction in flight operations by the airlines, their income stream and cash flows have been reduced. So BIAL is increasingly forced to rely on passenger based User Development Fee (UDF), which has both the Government and passengers united in their opposition.
An imposition of UDF by BIAL on domestic passengers will only aggravate the already bad situation, and result in a further compression of air traffic. A downward spiral into a bottomless pit.
A possible solution requires bold decisions. Something both the political and administrative establishment in India are not known for.
- Government has to pledge at least 10% of its fuel taxes towards public transportation infrastructure. My friends in the auto industry will hate me for this suggestion, but our cities are choking in their own growth.
- ATF pricing should be reduced to international price parity. Ex-refinery, and taxes, union and state. Everyone should share the burden, including the airports and airlines. They must pass on the savings and re-invigorate the market, not use it to butress their bottom lines.
- A moratorium on UDF for at least 12 months by all airports in India. Keep all possible costs low.
- Allow HAL airport to handle regional air traffic. BIAL, by sticking to its hardline, will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore. We have to bring them back in to the air.
- Diverting part of the regional traffic to HAL will give BIAL breathing room, and delay the need for a costly second terminal till world economic conditions improve.
- Forget a "temporary terminal". Passengers will not accept travelling 50km, paying a UDF, and then using a "tent".
This is just one view point. Other constructive suggestions are welcome via the comments section.
[Moved off the frontpage since not directly related to civic issues - blr_editor ]
I really do not know how much of our taxes get invested back for Bangalore's benefit. For the moment, let's put that aside for our discussion. One thing I have always wondered about our country after seeing other developed countries is ..where do our taxes disappear to? We always seem to be a "1) we are poor 2) we do not have enough money 3)we are 3rd world" country. We are not receiving benefits proportionate to your taxation on an average state level/national level let alone Bangalore city level. Devesh, in my opinion, if the taxes that were diverted for the rest of the state had been wisely spent without corruption on infrastructure and development of other towns with proper planning we would not be seeing the kind of uncontrolled growth & congestion in Bangalore city today. Devesh, I prefectly agree with you that proportionately taxes need to be invested back in Bangalore. But, we first need to figure out where our taxes are going in the first place. One may refer to using the RTI as a tool to find out...but the corruption is so deep that RTI sometimes is rendered useless. Here is an example -
a) There was a patch of land in RT Nagar which was a playground and a hotbed of illicit activities but was meant to be a park as per zoning laws. After spending 16 years fighting in the court it was turned into a park which was maintained well initially but has fallen into disrepair now. An application under RTI act was filed and the name of the contractor plus details of the value of the contract for maintenance was obtained, but to this day the contractor has shown up only 5% of the promised time but still takes home our tax paying money. The civic authorities who are earning salaries payed through our taxes have to be pushed and prodded before they put in a visit to the park or act. The police, earning our tax paying salaries are nowhere to be seen patrolling the neighbourhoods. I am sure, you having lived in the US, have seen what active police patrolling really is.
b) A house is being built next to my inlaws home in Bangalore in gross violation of building laws. It is totally different from the plan that was submitted to the authorities. When the executive engineer known to my inlaws was summoned he sheepishly smiled and said "adjust maadkoli saar, mane thaane. Balcony solpa eekede bandre yen aithu". Again, the property tax/other taxes you, me and others are paying is going toward his salary and he is not doing his job.
Now, coming to the high taxes on ATF and petrol/diesel we are paying, where are they going? Ok, for arguments sake let's say the benefit has been the golden quadrilateral in some ways, good mysore road, Konkan railway..then..can you add anything else? I am not sure I saw a significant improvement in aviation infrastructure or road infrastructure at all as a result of those taxes NOR did I see an active aggressive alternate fuel technology task force initiative from the government. We have all seen the repeated bad state NH 48 in shiradi ghats ..a lifeline to the hinterland of our state from the port of Managalore. Regarding power, forget it, I studied in Manipal and we used to have extended power cuts in those interior areas in the 90s(they continue to do so today).
"Allow HAL airport to handle regional air traffic. BIAL, by sticking to its hardline, will only continue to drive passengers away from the air, to trains and buses. A negative for all stake holders, including the citizens of Bangalore. We have to bring them back in to the air. "
Why would you oppose to people shifting to Trains and Busses for short distances? I'm curious. As in my previous post, wouldnt or couldn't train travel compliement air travel? Can't we have interaction between transport systems hence sharing the burden? Why do we need 3 modes of transport (bus, train and air) competing each other? There could be competition within, as private players as in Air and Bus.
Hi Devesh,
A crazy idea from my side. How about government making some changes to its policies and allowing BIAL to sell ATF at international rates? In other words, the ATF oil not going thru the retail of oil companies, waiving taxes, charges, etc. so that ATF is sold by airports, at "international rates".
This way, airlines are at a profit by getting low cost fuel, and BIAL getting profit by selling fuel. Thus, both can reduce fares levied on air travel - thus benefitting passengers.If this profit is big enough, then UDF can be waived.
Here is a link which gives year 2006 rates of ATF:
http://www.fiaindia.in/fiscal_issues.htm
excerpt: The ATF price in India is Rs 37,800 per kilolitre as against the international price of Rs 21,400 per kilolitre, which is about 77% higher (at December’06 prices). ATF prices for domestic operations in India are unduly higher than international benchmarks – resulting in a tremendous financial burden on Indian carriers.
Devesh,
If you are so worried about Bengaluru not getting it's share of the pie, then why don't you campaign for more of our direct taxes to be allocated to Bengaluru instead of Bihar as it is done now?
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