Will the Indian aviation industry take flight, despite recent challenges? 2012 has been a year of significant upheaval for the Indian aviation industry. While some players threatened to bite the dust, others weathered challenges such as burgeoning costs and plummeting profits. Yet despite all, the Indian aviation industry seems set to chart a positive course in 2013.
A bright future
The distress faced by some players has caused repercussions in the entire industry. "The future looks very promising as per us. Air fares increased by 40 – 50 per cent on account of 1) increase in fuel charges and 2) KF inventory going off (KF enjoyed a market share of 19 per cent till last year). The consumer finally reconciled to the increased fares and drop in traffic which is only going to be 2 – 3 per cent in YoY. Also with international routes opening up for all airlines, GDS and LCC, the fleet utilization became better leading to profits," affirms Sanjay Bhasin, MD, Goibibo.com.
Spicejet received stupendous response to its scheme of selling a million flight tickets in any major route in India for just 2013 rupees. "The aviation industry has been under constant stress due to the turbulence caused by multiple strikes and closing down of a leading airline's service, thus impacting the overall airline inventory available for the traveller. Factors like demand-supply mismatch, hike in ATF and airport charges coupled with a high tourist demand during the peak summer holiday season caused the fares to rise by 20-30 per cent in the domestic sectors last year. The airlines are gauging that, and have started the year with promotions offering deep discounted inventory to fill up seats during the lean period of Feb-Mar. We expect other airlines to follow suit aggressively and run discounts that will offer respite to the consumer. Having said that, LCCs flying from India to international destinations like IndiGo, Spicejet and AirAsia are also contributing towards making international travel more affordable and bringing it at par with domestic travel in India," opines Vikram Malhi, country head, Expedia India.
Desirable policies
Needless to say, the aviation industry can benefit greatly from assistance from the right quarters. "Based on the latest IATA Airline Industry Forecast, India is expected to see the second fastest compound annual growth rate over the period at 13.1 per cent for domestic passenger, thus making it the fourth largest domestic market in 2016. For international freight, India is expected to be the fourth fastest-growing (CAGR 6 per cent) from 2011 to 2016, making it the ninth largest international freight market in 2016. But the Indian aviation industry is struggling. While steps taken by the Indian government to allow FDI in Indian carriers is a welcome development on its own is not the panacea to solving the industry's problems. Among the things that are needed are policies to reduce the excessive tax burden currently placed on the aviation industry, lower external costs and ensuring adequate infrastructure to meet the growing demand," emphasises Albert Tjoeng, assistant director, corporate communications, Asia Pacific at International Air Transport Association.
On the bureaucratic front, better regulation might be the need of the hour. "It is high time that we have our regulator who looks at almost every aspect of the business and attains growth. General aviation requires separate independent self service airports only for private jet and helicopters. To enhance the quality of service for this sector, the infrastructure is extremely essential and FBOs will just deliver that. The policy framework when it comes to issues like taxation and fuel surcharge needs to be re-looked," suggests Rajeev Wadhwa, chairman and CEO – Baron Aviation.
Cautiously optimistic
"Depreciation of rupee, crude oil price volatility, high operating costs and prohibitive taxes continue to plague the sector. The outlook for the airline industry in short-term remains that of cautious optimism. There have been encouraging signals from the ministry and one hopes that pending reforms, especially on the taxation front and regional airports would be fast tracked in 2013," concludes Amber Dubey, partner and head-aviation at global consultancy KPMG. Thus, optimism is certainly in order, but with copious amounts of well-exercised caution.
Even as India’s domestic growth has deteriorated, fiscal deficit spirals out of control and investments have slacked, many analysts say that budgets have become a non-event for the markets.
While markets may look forward to the Union Budget, over the years, they have shown less volatility and more stability in its aftermath. Also, while the budget’s implications matter for sectors and companies, they too have diminished over the years. “Over the last few years, the Budget has increasingly become a non-event for the markets and market volatility on and after the budget-day has been dipping,” a HDFC securities report on pre-budget expectations noted.
The government of late has seen immense pressure from international credit rating agencies and the RBI to check the fiscal deficit and prune unproductive public expenditure, markets have increasingly been seen as moving on global cues. “While the markets may look forward to the Budget proposals with bated breath, we feel that the markets will be driven more by changes in global risk appetite and liquidity conditions than anything else,” HDFC stated.
While the market usually falls post-Budget, with India on average, down by 2.3% in the month after the Budget (with the first 15 days accounting for most of it and underperforming EM by 1.5%), comparing the market volatility of the 90s to what we see now, there has been considerable stability and we no longer see a double digit fall or rise in market like we did in the decade of the 1990s.
Not once since 2001 has the market seen a double digit volatility. In that sense, the markets have seen a decline in influence that the Budget has had on it from the 1990s, when the Budget was also used as a platform to announce reforms.
According to Morgan Stanley, the market’s performance pre-Budget (i.e., expectations from the budget) is also an important factor that has a bearing on its post Budget reaction. “If the market is up in the month before the Budget, it has an 80% prospect of falling post the Budget, higher than the overall probability of 60%. A market that is down before the Budget still holds an even chance of slipping further in the month after,” Morgan Stanley stated in a report titled ‘Union Budget ‘13: Will it be a Spring Clean?’.
According to the market movements may also have to do with the March effect, which is traditionally the worst month of the calendar year, partly to do with the Budget itself and also to do with fatigue from the performance of the winter months.
India will soon have a cyber security policy that will ensure preventive measures against cyber crime and fraud, the government said.
“We are working on a cyber security policy we need more work to curb cyber crimes,” Minister for Communications and Information Technology Kapil Sibal told the Lok Sabha during Question Hour. “It’s a new medium. We need to understand it and take preventive measures,” he said.
According to the minister, the computer emergency response team in India, CERT-In, was monitoring any suspicious move on the Internet in order to checkmate potential cyber attacks from hackers. The minister said that if any instance of fake calls on mobiles or emails promising a big award in exchange of personal information of a user is reported to his ministry, it will take action.
Sibal stressed the need for international agreements, saying that the intermediaries of various Internet service providers were located outside India, making it difficult to seek information from them. He supported the demand made by Congress MP Jai Prakash Agarwal that more public awareness campaigns must be run on the issue.
Mentioning also the misuse of Section 66-A of the IT Act (pertaining to sending messages on communication services that are false or offensive), the minister said the police were not aware of it. “We are for freedom of speech but it should not hurt others,” Sibal said, mentioning the misuse of social networking sites like Facebook, on which people post offensive text and pictures.
Controversial Pakistani actress Veena Malik has entered the Guinness World Records by receiving 137 kisses on her hand in one minute. She admits it is for the sake of her upcoming film “The City That Never Sleeps“.
“I am a celebrity anyway and if you say that it is for publicity, ok, yeah, we need publicity for ‘The City That Never Sleeps‘,” Veena said here Tuesday after breaking the earlier record set by Salman Khan of 108 kisses. “We have to break 20 records for the film and this is one of the records,” she added.
In 2011, Salman had got 108 kisses in a minute on a TV reality show “Guinness World Record – Ab India Todega“. It was Veena’s birthday Feb 26 and the men were chosen through contest “The City that Never Sleeps-Bollywood Hunt”. “Long back we decided that I will break this record on my birthday and now we have to break 19 more records for ‘The City That Never Sleeps’,” Veena said. “So if you call it publicity, then yes, it is for publicity. Films are for what? For publicity, right?”
When she was asked which Bollywood actor she wants to kiss on the screen, she said: “I would like to kiss the actor who does not like kissing on-screen and he is our ‘Dabangg‘ Khan Salman Khan. I think that would be beautiful if we have a kiss on-screen.”
What will Finance Minister P Chidambaram dish out on 28 February? Will the budget return India to the growth path or will it be mired in politics and compound the mess? Will the Food Security Bill cripple finances again after two years? Will Chidambaram be able to stick to his fiscal consolidation roadmap? INN tries to find out the answers to this pinning questions.
Q: Is there as much buzz and anxiousness around a federal budget in other Asian countries as in India?
A: India stands out in the Asian region with the nature and magnitude of the tamasha in the run-up to the Union budget. This is understandable for three reasons.
First, it highlights the extent of government’s interference via its tax policies in the Indian economy. Second, it underscores the uncertainty around the government’s approach with respect to specific fiscal measures, over and above the broader macro mess created by this government’s fiscal policies. Tax changes have positive and negative impact on different sectors and companies, hence the high level of interest and anxiety from stock market investors. Third, the hype is also fed by the plethora of print and electronic media covering the event, and the multitude of opinions that are expressed.
The level of tamasha in the run-up to the budget in India is itself a bad sign of a still-shackled economy. Indeed, India has a long way to go before the budget-related cacophony softens to the level in other Asian countries.
Lax fiscal policy has often been cited as a key factor behind India’s distressed macro which has also crippled growth. How quickly can this be reversed?
High fiscal deficits are like obesity: it is easier to put on weight than to shed the extra kilos. Similarly, fiscal correction is a slow process, unless forced by the exigencies of a crisis. Additionally, there could be adverse fallout on the growth momentum from fiscal correction which should not be ignored. Thus, fiscal correction is generally not painless.
A self-inflicted tragedy with India’s macro policymaking since the 2008 global financial crisis (GFC) has been the misdiagnosis of several economic ills which were worsened by wrong prescriptions. India’s speed, magnitude and coordination of fiscal and monetary policy mix to deal with the GFC were remarkable. In fact, revised estimates show that real GDP growth in 2008-09, the year which captured the full impact of the GFC, was 6.7 percent. Non-agriculture GDP grew 8.1 percent in that year. This was lower than the 10.1 percent in the prior year but the near-8 percent growth outcome when the world was on its knees is hardly anything to cry about.
The problems began with the delay in the much-needed timely and adequate withdrawal of the fiscal stimulus following the post-GFC recovery, which was aided by fiscal steroids. The rebound in aggregate demand in the chronically supply-challenged Indian economy along with the recovery in global commodity prices pushed up inflation, which already had some local structural drivers behind it.
This “money grows on trees” approach led to record-high market borrowings by the government, which in turn adversely affected private investment. The corruption scandals were the final straw that broke the back of investment by spreading risk aversion across the private sector and delaying timely decision-making by the bureaucracy.
India is now a low growth/high inflation economy, thanks to the gross economic mismanagement by UPA-2 headed by a trained economist. The macro healing will be protracted. Growth will improve slightly, possibly to around 6 percent in FY14 (2013-14) but a growth takeoff similar to 2003-07 in the next few years remains wishful thinking. It is often ignored that lasting low inflation and qualitative fiscal adjustment are prerequisites for India’s sustained growth acceleration.
How can the forthcoming budget play a constructive role in India’s economic healing?
India needs three related macro adjustments: (1), the twin deficits need to be brought under control; (2) fiscal policy should be tighter, which in turn will create room for monetary policy to be loosened; and (3) investment needs to become a more important driver of economic growth than consumption.
Frankly, the budget is not the forum for fixing all these issues. Still, a practical and sensible macro framework can be presented with some meaningful fiscal action and credible guidance. The latter is crucial because this government has an exceptionally poor fiscal track record. To be fair, the process of fiscal correction has already started following the recent emergency-like spending cuts. The key is the sustainability of fiscal healing – and does not mean improvement for just one or two years.
The political pressure to compromise the spending discipline will be high, especially in the second-half of FY14. Thus, Finance Minister P Chidambaram will probably deliver a “responsible” budget that cuts the fiscal deficit. But whether he will stick to it in the run-up to the next general election is the key issue. Most likely, a slight slippage from his fiscal roadmap will occur even if the broad direction is maintained. Just because the government got into an overdrive to cut spending this year to gain credibility by finally delivering on its revised fiscal deficit target is no reason to expect an encore.
Sustained fiscal correction will ease the aggregate demand pressure, which will be favourable for the inflation outlook. In turn, this will facilitate more interest rate cuts. Importantly, such an outcome in no way eliminates the urgent need for reforms and supply-side initiatives for a long-lasting decline in inflation.
What are your expectations from the forthcoming budget?
Finance Minister P Chidambaram has reiterated his guidance of cutting the fiscal deficit to around 5.3 percent of GDP in FY13 and to 4.8 percent in FY14. I expect him to come through on these. Expenditure control will be of prime importance. Direct and indirect taxes are unlikely to be raised but there is a strong possibility of a temporary surcharge on the income of the very rich and an inheritance tax. Both are essentially political posturing as the government can collect more revenue by merely improving the tax compliance. Some tweaking of exemptions in excise duty and service tax is likely.
The actual fiscal deficit in FY14 could be slightly higher, say, around 5 percent, but let us wait for the actual details of the FY14 budget. The real test for the FY14 budget won’t be what is shown on paper; that is the easy bit. Instead, it will be the commitment to stick to the fiscal deficit target as the year progresses.
The Direct Tax Code (DTC) will be delayed, again. This time because Chidambaram might want to take a fresh look at it. He’ll likely indicate the broad contours of the anticipated goods and services (GST) tax and also include the outlines of the amendments to Constitution on the GST. However, it’ll be disappointing if, after the repeated delays in recent years, there is no airtight deadline.
Most investors have lost sight of the fact that in its rush to show progress on the GST, the government has compromised the effectiveness of the GST. Multiple rates and varying timelines for states to adopt the GST will limit the potential benefit from creating a national common market and also give birth to complications. Don’t forget that the GST is meant to get rid of complications, not create new ones from a sub-optimal design. Half-baked reforms are not the way to go.
There could be some measures to encourage retail participation in the equity market. While these could be positive for the equity market, the underlying impact on fixing the economic ills will be practically zero. The real economy is screaming for more pertinent action, not merely changes that push up equity prices. If economic structural problems could be solved by just pushing up stock prices, equity brokers would be manning policymaking (there are good reasons why this doesn’t happen in any country).
Finally, expect more song and dance about the cash transfer scheme even as the government goes ahead with the National Food Security Bill (NFSB). The potential net fiscal savings from the cash transfer scheme is being played up. For the record, there will be fiscal savings because of better targeting of subsidies and cutting leakages, both of which will be the result of the pace of implementation of Aadhaar, not cash transfers per se. More likely than not, politicians will find ways for spending the initial savings, which will partly be a function of how quickly bank penetration can be increased.
How worried are you about the National Food Security Bill (NFSB)?
Weak fiscal dynamics have always been India’s Achilles’ heel. Coalition politics and uncertainty about how long a party will be in power often breeds economic short-sightedness. Also, the ruling UPA government has been in favour of using fiscal policy under the guise of an “inclusive” or “redistributive” agenda for its political goals.
Sonia Gandhi, the populism-favouring President of the Congress party, reportedly directed the government recently to widen the coverage of the NFSB. Ironically, while Chidambaram is attempting to fix what was broken, Sonia Gandhi’s populist initiative is sowing the seeds of another problem.
Following the proposed changes, the NFSB’s coverage will probably increase to nearly 70 percent from the initial estimate of around 67 percent of total population. The implementation of NFSB will be spread over two or three years, and the forthcoming budget will reportedly initially allocate around Rs 50 billion (Rs 5,000 crore, which will be over and above the usual allocation for food subsidy). Officials reportedly indicate that the overall food subsidy will increase to around Rs 1.2 trillion (Rs 1,20,000 crore, or 1.1 percent of FY14 GDP on our estimate). There will also be implementation cost.
The recent reduction in fuel subsidy is welcome, but its positive impact on the headline fiscal deficit will be meaningfully offset by higher food subsidy. Few are opposed to helping the poor but the problem with the NFSB is more serious. It will make the government’s discretionary spending more inflexible, shrink room for counter-cyclical measures in down years, and add to inflationary pressures, especially during poor monsoon years.
Indeed, the fiscal slippage in drought years could be more pronounced due to the legal entitlement of food subsidy. There will also be serious challenges with respect to higher foodgrain production, procurement, storage and distribution. Overall, the NFSB does little for food security but will surely increase fiscal insecurity.
What is the outlook for government borrowing?
Higher borrowing facilitated elevated government spending in recent years, boosting consumption instead of being used for growth-enhancing and investment-friendly initiatives. This, in turn, worsened inflationary pressures and fueled macro imbalances.
Following the recent cancellation of the last auction of the fiscal year, gross government borrowing in FY13 stood at Rs 5.58 trillion (Rs 5,58,000 crore) compared to Rs 5.7 trillion (Rs 5,70,000 crore) pegged in the FY13 budget. Our expectation is that gross market borrowing in FY14 will be marginally higher at around Rs 5.97 trillion (Rs 5,97,000 crore). This is based on the likely official fiscal deficit forecast of 4.8 percent of GDP. The size of the borrowing in rupee terms will be a record-high, although it’ll be down as a percentage of GDP. The combination of gradual fiscal correction and the scope for further monetary easing sets up a favourable backdrop.
Do you think the medium-tem fiscal consolidation roadmap by the government is credible?
The ambitious path of fiscal correction announced by the government looks good, but only on paper. It is sensible to be sceptical about the targets beyond FY14 as implementation will be exceptionally challenging. The path envisages the federal fiscal deficit shrinking to 4.2 percent of GDP by FY15 and to 3.0 percent by FY17. To put the forecast in the proper context, India’s fiscal deficit averaged 3.3 percent per annum in the three years to FY08 when real GDP growth averaged an unprecedented 9.5 percent annually. India is not in a similar up-cycle in the coming years by any stretch of the imagination.
Also, the government’s plan does not take into account three factors which could adversely affect the fiscal correction. First, a general election has to be held by May 2014 (but could be earlier in late-2013). Consequently, the sizeable reduction in spending will be challenging. Second, the official fiscal roadmap does not include any impact from the anticipated hit from the Food Security Bill. This is a key initiative of the Congress party’s leadership and is likely to be launched ahead of the next general election.
Third, the Fourteenth Finance Commission (FC), a constitutional body set up every five years to make recommendations on the distribution of sharable taxes between the central and state governments) would form the basis for the fiscal policy after FY15. Thus, the fiscal correction path after the general election and after incorporating the recommendations of the Fourteenth FC is bound to look different from the current official indicative path.
Any suggestions for the finance minister?
Chidambaram cannot please everyone. He should be mindful that unrealistic assumptions for GDP growth, revenue mobilisation and/or spending cuts will be treated negatively, even if they aid him in delivering on his fiscal deficit guidance.
This could also unnecessarily negate some of the gains he has made in the last few months. The key message has to be credible fiscal correction, and he will be judged not just by what he shows on paper but also by whether he sticks with the fiscal discipline over the course of the year.
Finally, he and the government should be aware that the populism and fallout from the NFSB will not be ignored by investors or credit rating agencies, even if the cost is initially underfunded in the forthcoming budget.
Yesterday during the Railways Budget Speech for the year 2013-2014, Railways Minister Pawan Kumar Bansal proposed that the ministry would try and provide free Wifi facility in some trains. Obviously it is safe to assume that these will be in the high-end trains like the Rajadhani and Shatabdi.
The minister’s proposal has predictably sparked off jokes on Twitter, with many questioning whether it will actually be possible to have ‘functioning Wifi’ on a running train in India. In fact the hash tag, Free Wifi is still trending on Twitter.
While the promise is a welcome idea, here are a few questions that we raise about the feasibility of having free Wifi on a running train?
1) Signal connectivity: This is going to be the biggest challenge. If you’ve traveled on a long train journey, say from Mumbai to Lucknow, one of the first things that goes is mobile phone connectivity. The reality is that a lot of India, has zero or very little signal connectivity. So how will the government ensure Wifi connectivity in such scenarios in anyone’s guess. To ensure constant connectivity, would require a lot more infrastructural investments and more signal towers. You can also check out this post on how China’s Beijing-Shanghai train loses its 3G once it moves out of Beijing.
The connectivity issue is not just for a long distance journey. Even a short six hour journey from Lucknow to Delhi via the
Shatabdi doesn’t ensure constant mobile or 3G via dongle connectivity for me. So yes, while the idea is great, it needs to be backed up with some solid infrastructure commitments as well.
2) Population problem: A railways coach in an third AC-Chair car has around 72 seats. The standard number is 72 for most railway coaches. A lot of those people do have smartphones, laptops etc. Imagine more than 50 people with their various devices trying to get access to wifi on a router attached to the corner of a train coach. It’s highly unlikely that the speed is going to be very fast.
The other problem is that in India, we have very little civic regard for public property. One of the most common jokes on Twitter was that Wifi routers from the trains are likely to get stolen. Sadly this is the truth. I’ve seen people whacking cups, thermoses, etc from Shatabdi trains, leaving litter on the trains. This is not to imply that all of us are thieves but the fact is remains that public property is treated shabbily in India. Protecting the routers will be another hassle for the government.
3) Free or paid: At the Delhi Airport, you get 20 minutes of free wifi access and beyond that you have to pay. When you connect you are also taken to a log-in page where you have to put in your details such as name, mobile number, etc.
In the case of wifi on trains, won’t it be better that a cash-strapped railways should ask consumers to pay for the service rather than hand it out for free? From a security viewpoint, a log-in page is definitely a must. Or perhaps, while booking the ticket, users can pay extra for the Wifi and have a special code attached to their ticket which they can then use to access the Internet.
For instance in Queensland, Australia, there is a 20 MB data limit per session for those who access the Wifi in trains.
Connection is restored after 4 hours in case you exhaust it. Game downloads, which hog a lot of bandwidth are blocked.
India will definitely have to look at such restrictions given how large our population is.
In a highly-connected world, Wifi on running trains sounds like a great proposal, but the truth is that it needs some concrete commitments in the form of infrastructure, logistics and security. Till then, this sounds good only on paper.
The finance ministry delivered a report on the state of the economy today, a day before Finance Minister P Chidambaram unveils what is expected to be the most austere budget in years.
“Indian economy is likely to grow between 6.1% to 6.7% in 2013-14 as the downturn is more or less over and the economy is looking up,” said the report which was prepared by Raghuram Rajan, the former chief economist to the International Monetary Fund (IMF) who became the top adviser in the finance ministry last year.
The Economic Survey sees sluggish industrial growth likely to improve in FY14. “The overall economic environment remains fragile,” the survey said.
According to the report, to rein in current account deficit focus has to be on curbing imports, making oil prices more market determined.
The survey points out that the priority for the government will be to fight high inflation by reducing the fiscal impetus to demand as well as by focusing on incentivizing food production through measures other than price supports. But unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals.
On the Balance of Payments and External Position, the survey highlights that with net exports declining, India’s balance of payments has come under pressure.
The survey calls for a widening of the tax base, and prioritization of expenditure as key ingredients of a credible medium term fiscal consolidation plan.
The survey also said that lower interest rates could provide an additional fillip to investment activity for the industry and services sectors if some of the regulatory, bureaucratic, and financial impediments to investment are eased.
The survey, however, was optimistic of the government meeting its fiscal deficit target of 5.3 percent despite “significant” shortfall in revenues in 2012/13.
“These are difficult times, but India has navigated such times before, and with good policies it will come through stronger.
Slowdown is a wake-up call for increasing the pace of actions and reforms. The way out lies in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation, in part through structural reforms, combating inflation both through monetary and supply side measures, reducing the costs for borrowers of raising finances and increasing the opportunities for savers to get strong real investment returns,” wrote Raghuram G. Rajan, Chief Economic Adviser, Ministry of Finance.
Here are the highlights:
- Economic Survey projects 6.1 to 6.7 per cent growth rate for 2013-14.
- WPI inflation may decline to 6.2-6.6% by March
- Lower inflation will create room for rate cuts
- Government’s priority will be to fight high inflation.
- Revival Of Investment In Industry, Infra Key Challenge
- FY13 Tax mop-up significantly lower than budget estimate
- Food Inflation Mainly Driven By Cereal Prices
- Revival of growth expected to be slow
- Medium-term Fiscal Consolidation Plan ‘Credible’
- Need To Stay On Path Of Indicated Fiscal Consolidation
- Need to curb gold imports to cut CAD
- Need to raise diesel and LPG prices to bridge
- Oil subsidy key risk to fiscal deficit, food subsidy bill may push up subsidies
- Economic slowdown a wake-up call for stepping up reforms
- Fund flows to Be influenced by risk perception Of investors
- April-December Data Shows 5.3% Fiscal Gap Aim ‘Achievable’
.jpg)
.jpg)
.jpg)