Fueling the fire

Two wrongs don’t make a right. India’s beleaguered aviation sector needs a boost. But, letting airlines avoid punitive state taxes by directly importing fuel isn’t smart. Some tax is necessary to pay for environmental costs. The real target should be the subsidy given to the loss-making state-owned Air India.

The sector as a whole is predicted to lose $3 billion in FY12, according to the Center for Asia Pacific Aviation. The cumulative debt burden of the three big carriers — Kingfisher, Air India and Jet Airways — is $16 billion. Air India’s debt alone is $8.8 billion. Kingfisher has struggled to buy fuel and pay salaries, airport charges and interest to its lenders.

A ministerial panel is proposing that firms be allowed to import fuel directly. If the Cabinet approves the plan and the logistics can be made to work, this will have a big impact on firms’ costs. State taxes on aviation fuel average around 24 per cent — the second highest in the world. And, fuel accounts for around half of the operating costs.

But, there are two problems with the plan. First, while India’s taxes may be excessive, slashing these to zero is not the answer. The industry’s environmental costs should be paid for by taxation. Second, India actually has a surplus of jet fuel and exports half its production annually. Creating an incentive to import fuel looks dumb. Reducing tax levels to international norms would be better.

What’s more, the elephant in the room is Air India. It racks up monthly losses of $122 million. In the same breath as the fuel announcement, the panel recommended state-owned banks reschedule $1.5 billion of the carrier’s debt over the next 10 years. This is the latest example of state aid which allows Air India to finance a price war that has queered the pitch for the industry. The priority should be to force the carrier to improve efficiency, so weaning it off subsidies, even wind it down.