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Aviation Sector And Indian GDP


The first commercial flight in India, from Allahabad to Naini, was operated on February 18, 1911 by French pilot Monseigneur Piguet. It was only, however, 1932 that the first licensed business carrier of India was founded by Jehangir Ratanji Dadabhoy, 'Father of Indian Aviation.' Tata Airlines was based in Mumbai and both mail and passengers were transported across India. It was renamed Air India in 1946.[1]

The Indian Government acquired 49 percent of that airline two years later and nationalized the airline fully in 1953 in accordance with the 1953 Air Corporations Act. Not only did this legislation allow for control of the previous Tata Airlines by the government but the whole sector was nationalized. Either Indian Airlines Corporation or Air India International were all merged into existing companies. For the next forty years, this monopoly continued.[2]

The aviation sector was open again to private participation only after the Indian economic liberalization in the 1990s. In India, the aviation sector grew slowly despite an early start in the 1900s, mainly because air transport was traditionally only for the elite but not to the masses.

However, in recent decades the sector grew exponentially due to structural reforms, airport modernization, the arrival of private airlines, the adoption of low-cost models and service standard improvements. In support of growth in aviation, the government also played a major role in encouraging the private sector in building airports through Public Private Partnership models and providing State support about concessional land allocation, financing, tax holiday and other incentives.[3]

Aviation Industry In 20th Century

There are 464 airports in India, 125 of them operated by India's Airport Authority (AAI). The 125 AAI airports handle nearly 78% of passenger traffic and 22% of passenger traffic internationally. In April 2018 - Feb 2019 the Indian passenger traffic stood at 316,51mn. Domestic transport of passengers stood at 252.92 minutes, with international traffic at 63.59 minutes. The traffic, passenger, and freight traffic across all Indian airports increased in February 2019 by 4.9%, 4.5% and 3.1% respectively, as of February 2018.

In comparison with 31.5% of domestic freight traffic, however, the share of foreign freight traffic is far higher by 68.5%. The MRO industry is projected to increase from $950 million currently to $1.2 billion by 2020.[4]

The Indian Aviation Sector Fastest Growing Sector

There are several segments in the civil aviation sector, including helicopter/hydraulic services, ground handling services, maintenance, and repair organizations, flying training institutes, and technical education institutions.[5] However, the health of the sector is often primarily identified with the expansion of planned airlines and public airports. Today, with a global market size of around US$16 billion, India is the 9th biggest aviation market in the world. The civil aviation sector grew 13.8 per cent over the last 10 years and, from April 2000 to February 2015, the FDI attracted over USD 569 million.[6]

Passenger traffic also increased by 12.47 percent, reaching 190 million passengers by 2015, with an annual average growth of 12 percent (for domestic passengers) and 8 percent in the next 5 years. (FY 2015) (for international passengers).[7] Crisil Ltd. recently projected a total profit of 1.29 billion USD for airlines operating in India in 2016. Moreover, the Indian aviation industry will continue to grow rapidly in the future. IATA has reported that the total annual passenger volume in India will increase to 367 million by 2034. The UK will become the 3rd largest market in 2031. This not only means an increase in aviation services in the coming decades, but also an increase in demand for maintenance, repair, and refit services ("MRO").[8]

Players In Aviation Sector


Airlines in India are operated by scheduled and non-scheduled airlines that play a crucial role in the aviation sector's development as services such as ground management and MROs are further driven. Domestic scheduled operators such as Air India, Air Asia (India), Jet Airways, Jet Lite, Spice Jet, Go Airlines, Vistara (TATA SIA Airlines) and Indigo Airlines dominate the passenger and cargo transport market.[9] Air India is the domestic airline of India and accounts for only about 13% of the domestic passenger market, a considerable drop in its monopoly of 100% before the economic liberalization of India. More than 60 international airline carriers make up 65% of international air travel from and to India.[10]

The IPO has recently been launched since 2012 by InterGlobe Aviation Ltd, Indigo Airlines' owner (the largest Indian airline by market share). Indigo has been the only airline in the last seven consecutive years that has reported its profits in 2006, founded by Rakesh Gangwal and Rahul Bhasa. When Indigo Airlines was entering during a period in which Jet Airways was the dominant market, it became the low-cost airline by redefining its concept.[11] In September 2015, SEBI approved the Rs. 2,500 crore public offer of InterGlobe Aviation Ltd. The company started the IPO for three days before October 2015 and raised Rs. 3010 crore totals.[12]


Airports are also an important part of the aviation industry's development. In India, there are currently more than 115 airports and civil enclaves, 17 of them international airports.[13] In metropolitan areas such as Mumbai, Delhi, and Bangalore, however, most passenger-traffic active airports are located, whereas in cities such as Jaisalmer, Rajasthan, smaller airports are currently not in operation.[14]

By increasing regional interconnectedness, the Government aims to address this discrepancy with a US$1.3 billion investment in upgrading and modernizing non-metro airports in 2013 to 2017. The Government intends to have 200 new low-cost airports in India that connect the cities of level I and level II by 2020.[15] In addition, new airports have already been developed in the Navi Mumbai (Maharashtra), the National Capital Region of Dholera (Gujarat) and several counties in Andhra, Pradesh.[16]

State governments continue to be involved in regional development of airports by providing land for the construction of airports and by forming joint ventures ("JV") in cooperation with private participants.[17] The development and management of new airfields is then carried out by such JVs or by private / public partnerships ("PPP").

The first greenfield airport in India to be developed through the PPP model, was, above all, the Cochin International Airport (CIA). The plan was initiated in 1991 to build the new airport. Due to the incapacity of Sri J Kurian and others for the former National Airports Authority ("NAA"), the funding of the airport is assumed, while NAA provides technical services.[18]

Foreign Direct Investment In Aviation Sector

The provisions of the Foreign Exchange Management Act ("FEMA"), 1999 regulations of the Reserve Bank of India ("RBI"), the Ministry of Industry, the Secretariat for Industrial Aid (the Ministry for Trade and Industry) and the Central Government are governed by foreign investment in India ("the Ministry of Commerce"). In accordance with FDI policy, foreign investors are permitted to invest in helicopter services, ground handling, maintenance, and repair agencies, flying training institutions and technical training institutions. However, the major foreign direct investments in airports and airline operators have traditionally been undertaken.

Foreign Investment In Aviation Operators

In companies operating scheduled and unscheduled domestic passenger airlines, a significant portion of the total FDI in the aviation field is produced. Scheduled operators provide air services between two or more places and operate on a regularly or so frequently published timetable or flights that each flight will be operated by members of the public, as it constitutes a recognizably systematic series. In contrast, air transport services are provided by non-scheduled operators which can be charters and/or unscheduled. Times schedules or tickets for passengers shall not be published by such operators.

The applicant must either be an Indian citizen or a business company which has its head office inside India, its Chairperson and at least two-thirds of its Directors shall be Indian citizens and their substantial ownership and control shall be conferred on Indian nationals to achieve their status as a Scheduled or Non-Programmed Operator. The applicant shall also comply with certain additional requirements set out in Annexure 1.

FDI In Civil Air Transportation Services

In Scheduled Air Transportation Services/Domestic Planned Passenger Airlines and Regional Air Transportation Services up to 49 percent FDI may be authorized via automated routes. In such segments under the automatic route, NRIs can receive a full 100% FDI. In addition, 100 percent FDI in Non-Planned Air Transportation Services is also allowed and Helicopters and Sea planes Services requiring DGCA automatic route permits.[19]

FDI By Foreign Airlines

Before 2012, the investment of both Scheduled and Non-Scheduled Airlines by foreign airlines was prohibited. The Government however opened the segment to FDI by foreign airlines pursuant to Press Note 6, 2012, issued by the Ministry of Commerce and Industry.[20] FDI currently only allows up to 49% of the paid-up capital of the company but must be carried out via the approval route by the government. In addition, the 49% cap also covers investment by FDI as well as FPI/FII. All foreign nationals likely to join the Scheduled and Non-Scheduled Air Transport Service must first obtain security clearance and the Minister of Civil Aviation must clear all technical equipment imported because of investment.

In addition, substantial ownership and the efficient monitoring and management of the company should be maintained within India if a scheduled or non-scheduled operator's license is to be obtained. Foreign airlines may invest, according to the limits and entry routes specified in this Chapter, on the equity capital of cargo operators and helicopter and seaplane services.

Foreign Direct Investment In Airports

The aviation sector's airport segment grows to meet increasing passenger demand. A significant investment in the Airport infrastructure is expected to increase passenger numbers in the next decade by 300 percent.[21] Given this necessity, the Government has not adopted the Public Private Partnership (PPP) model for various airport projects, and the AAI itself has neither the resources nor the expertise to grow in this area. As of March 2015, the PPP model has been used by 5 international airports, which account for approximately 60 percent of the country's total passenger traffic.[22]

The Government has recently made further efforts to promote the use of the PPP model for airport development. For example, under the NCAP 2016, the MCA committed to coordinating multi-modal internal connectivity (roads, railways, subways, waterways, etc.) with the respective ministries and government governments to the success of airport plans. The Commission has also ensured that AERA, AAI, airlines, airport operators and stakeholders, including cargo, MRO's, and ground handling service providers, are coordinated to determine ways of cutting airport charges whilst still respecting the provisions of the existing agreements.[23]

FDI In Airports & Other Related Services

The Central State authorizes 100% automatic investment in Greenfield airport projects under the 2016 Consolidated FDI Policy. FDI is also 100% in existing airport projects, however only 74% is allowed by the automatic route. Automatic paths in maintenance and repair agencies, flight training institutions, technical and land management institutes, subject to industry regulations and safety clearance, FDI up to 100 percent is allowed.

Private Ownership Of Aircrafts

(Generation Of GDP) Private aircraft can be operated in India in various ways. The simplest thing, however, is to buy from its present owner or jet manufacturer an aircraft already located in India. However, given the limited number of private jets in India (not least because many want their jets tailored to their own needs) and that these jets are not manufactured domestically, it is possible to import private aircraft from abroad.

A company with either an operator's permit or an unplanned permit to provide air services to the importer is typically importing an aircraft into India. Companies holding Non-Scheduled Operator permits are offered Charter Air Services such as a service by well-known airlines such as Indigo and Jet Airways. The operator's permission is provided by the Scheduled Operators. Aircraft can, however, also be imported into India and operated under 'private aviation' category. A private aircraft includes any aircraft not operated for recruitment, recompense, or remuneration.[24]

Operating Permit In India

Non-Schedule Operator's Permit (NSOP)

It is different from a car when you import an aircraft. The plane has strict rules and inspections of its owner by the Department of Civil Aviation and General Director of Civil Aviation. The owner must maintain safety and navigability and give very good pilots to the aircraft. In India, you can either use private-owned aircraft or operator permits (NSOP). Aircraft owner uses personal aircraft under private ownership while purchasing commercial aircrafts under NSOP, company or individual aircraft. Both categories differ in the structure of import duty in India.

Aircraft Financing-Guidelines Issued By RBI

Line of RBI for those who believe that aircraft is an asset in India, "it is not an asset." According to the RBI Guidelines, in India, aviation's or ships are not categorized as assets. The fundamental reason is that there are not many aircraft in India, and they cannot be traded as property. This clause makes it particularly difficult for aircraft to be financed in India.

Domestic V. International Sources Of Financing

Customers who are interested to finance their aircraft may receive their funding from sources such as banks, private equity funds or NBFCs, or national or international finance. Each financial institution has its own set of rules for financing aircraft.
  • Domestic Banks

    Aircraft is understood by domestic banks in India as equipment, and some very specific banks provide up to 90% financing for aircraft lending. In addition to the Personal or/and Corporate Guarantees, however, banks will require significant assets based on the Indian Reserve Bank's policy as collateral to approve such funding.

    A detailed set of documents shall be submitted to the Bank to allow the Bank to obtain bank loans for your aircraft, including a no objection certificate from the Ministry of Civil Aviation and the Director-General of Civil Aviation. Domestic banks can also provide Indian business with up to 90% finance with the product Buyers Credit Foreign Currency Loans.
  • International Banks:

    Foreign banks can supply customers in India with dollar or Euro loans. LIBOR is the basis of these loans (London Interbank Rate). In 2001 the Cape Town Convention was held to considerably make owning an aircraft in India much easier due to obstacles in the understanding of aircraft as assets in India under RBI and many other emerging countries. Foreign banks can offer a proper leasing structure for aircraft ownership in India by means of the Cape Town Convention in Place.
The most common leases are 2 categories, Operating Lease and A Finance Lease.
  1. Operating Lease

    The most flexible leases enable companies in India to operate an aviation without the approval of any Reserve Bank of India. Authorized dealer banks allow permits and process payments for leases in an operating lease structure themselves. Under Operating Lease aircraft ownership remains with its Lessor, while the Lessee can operate the aircraft on an on-going basis through its regular maintenance and operation under the guidance of the General Director of Civil Aviation India. Ireland's operating leases are the most popular since Ireland also has a particular tax friendly structure in the International Registry of Mobile Equipment (Aircraft). Businesses for aircraft of category I can benefit from an operational lease structure of up to 100%. The financing of Category II and III aircraft for an operating lease is 75% -90%.
  2. Finance Lease

    Financial rental arrangements allow companies to claim ownership of an aircraft by structuring leases with a fully amortizing structure or partially amortizing structure which can be bought at the end of the rental term. Structuring the lease as a financing lease permits customers to benefit from the depreciation of assets and collect it on the balance sheet. All financial leases structures require an External Commercial Borrowing Approval from the Indian Reserve Bank for 3-4 weeks. RBI Financial Lease Application requires both Lender and Borrower details.

With-Holding Taxes & Customs Duty

Duty to the Customer category 18-26% and duty of up to 6% of the aircraft value for a non-schedule category shall be paid for a No Objection Certificate by the Customs department. And all outgoing rental payments to non-Indian banks after 2008 are subject to the With-Holding tax. In case of holding taxes, the lease payments can be 10-20%.

Barriers To Entry In The Aviation Sector

  • Government Regulations
    Airlines have many governing rules and may be a barrier to entry for some airline contractors by complying with all of them. A mandatory 30-minute notification on flight status changes and airlines' rules on how to handle tarmac delay costs more than $1.5 billion a year for all the airlines, including compulsory compensation for denied bookings
  • Cost Of Fleet
    For many newcomers in the airline industry, purchasing an aircraft fleet is an important barrier to access. As of July 2015, prices of a single aero plane for a small Embraer prop aircraft for a regional service range from around $11 million, and for a Boeing 777 over $320 million. However, several financial programmers, which support start-up airlines, cover that expense, and many start-ups use creative finance to stock their fleets. However, it is not an easy industry to break into without a huge amount of cash.
  • Fuel
    In addition, fuel is the largest barrier for many new entrants in the industry even at the other cost of starting an airline. In the New York Times, fuel costs represent up to 50% of the airline's costs, according to a 2012 report. Without financial strategy committed to specific purchases well in advance, the fluctuation of fuel prices may make it difficult for a startup to accurately budget.[25]
  • Pilots
    For a company, several start-up service positions are necessary, but the start-up also requires qualified talent in the seat of a pilot. A Wall Street Journal 2014 article describes a continued pilot shortage and notes that new pilots often prefer a career with an established company rather than a riskier start-up.[26]
  • Competition
    Except for government deregulation, new airlines can only experience a considerable obstacle to entering a major airport. The New York Times reports that only a few major airlines control most gates at large hub airports, making it hard for new airlines to take over in those markets. The New York Times states.

Concluding The Aviation Sector & Indian GDP
In the last decade, the airline industry has faced barriers, including rising ATF costs, discontinued airlines, and over-saturated airports. But the industry has started to develop its inherent growth potential.[27] The growing population of the middle class and increased disposable income have led to a substantial increase of passenger traffic. This increase in the number of persons travelling every year resulted in demand for services in civil aviation. This demand has been addressed in several ways by the Central Government. It did not only elevate the FDI limit allowed for the industry but also allowed foreign airlines finally to invest in the airlines segment of India.[28]

In the context of the aviation sector, a report said that Rs 33,000 crore, or 0.5 percent of India's GDP, currently contributes and supports 1,7 million employment in the country, besides the creation of much-needed critical assets.

He said:
It is expected that this contribution will further increase, as the sector will recuperate after a number of difficult years, in which many companies suffered losses, because of the contributions of RS 87,500 crore to social security and tax. Another Rs 16900 crore in government revenue has been estimated by the study to measure the economy in India through taxation via indirect and induced channels.[29]

Through its direct output the sector also contributed Rs 14,700 and Rs 10,700 through the supply chain indirectly. In addition, the Oxford University joint venture provided a further Rs 58,200 crore for catalytic benefits through tourism, increasing its overall Rs 91,200 crore or 1.5 percent GDP consultancy. It also said that it supported employment of another 7,1 million people by catalytic effects, such as tourism, and supported 276,000 jobs directly, another 841,000 indirectly via their supply chain and a further 605,000 jobs through spending by sector employees.

Recognizing that Indian airline carries 71% passengers and 77% freight, they have "flowed through the Indian economy, generating multiplying effects on Indian National revenues or GDP," wages, profits and tax revenue generated by Indians.[30]

  3. Directorate General of Civil Aviation (DGCA)
  6. IATA Press Release
  7. Market Share Analysis
  17. Non-Scheduled Operators include cargo carriers.
  18. Investment by Foreign airlines into Air India continues to remain prohibited.

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