Flying against the wind

Capping short-haul air fares is retrograde

The government’s plan to limit airfares for hour-long flights to Rs 2,500, as the Union civil aviation minister announced in Parliament this week, suggests that the government is yet to acquire clarity on its priorities in economic policy making. The statement came in response to complaints from members of Parliament that air fares tended to become exorbitant during emergencies. These grievances are valid, but the response is not: indeed, the logic of an administered price for short-haul flights is not immediately clear. For one, the assumption that it is only fares of flights of less than one hour that jump during emergencies is flawed. For another, the logic of such government intervention is unclear as air fares can be kept under check on a case-by-case basis when crises demand it — especially when airlines have shown themselves willing to cooperate in the past.

It must, however, be noted that the minister justified the short-haul fare cap on the ground that this would help strengthen regional air connectivity. This is an unexceptionable objective but achieving it demands enhancing aviation infrastructure and safety standards. Capping air fares as a market-building tool betrays a fundamental misunderstanding of the price-demand equation. The system of dynamic fares that offers consumers a wide choice is a healthy and automatic leveller that has functioned fairly efficiently for some years without government intervention. Equally, a fare cap is unlikely to encourage private airlines, which dominate the aviation business now, to ply these routes. Administered fares also have a discriminatory impact in two respects: it diminishes business for the railways, which should arguably be the transport solution of choice, and ends up subsidising classes of consumers – the rich and middle class – who don’t need price protection in the first place.

In a broader context, this proposal underlines a general philosophical shift in the political discourse away from market principles and back to the kind of dirigisme that yields selective benefits. The introduction of minimum import prices is a case in point; large corporate commodity producers gain at the cost of downstream customers with lower wherewithal to combat high cost. The cooking gas subsidy as it stands mostly benefits rich and middle class households. Abolishing it is an obvious solution that the government is yet to implement. Nor is this approach limited to the Centre. The Aam Aadmi Party’s decision to ban peak-hour premiums by taxi aggregators is another example of misplaced priorities resulting in suboptimal outcomes. The embargo during the road-rationing scheme for cars was inexplicable because it didn’t help any aam admi who access mass transit systems like buses and the metro rail. Instead, it protected the interests of rich and middle class consumers who can well afford to pay premiums — and they too were not served in this instance since taxis were conspicuous by their absence at peak hours. The proposal to fix some tariffs for the airline industry, which has manifestly been a beneficiary of economic liberalisation and a job creator too, is part of this trend.