Laveesh Bhandari: It's time for civil aviation reform to take off

The changes suggested in the proposed civil aviation policy encourage competition and offer more choice to consumers

Incumbents in the airline industry are said to be up in arms against the proposed civil aviation policy changes. While incumbents typically oppose any liberalisation or reform that encourages competition, they rarely threaten court action. While that is a moot possibility, a government on the back-foot due to a sustained growth slowdown, may be pushed into an ill-considered backtracking on its proposal.

Arguably, no other proposal from this government has been as pro-competitive as the civil aviation one. The proposed reforms have three key components that are notable in their orientation. First, the relaxation of the 5/20 rule for international flights; second, the auctioning of bilateral rights; and third, the relaxation of the international ownership cap of 49 per cent in the airline sector. Each of these is an important liberalisation measure, effective by itself in enhancing competition, and even more effective when introduced together.

In the India of today, many believe that economic reform is about greater incomes driven by greater investment. However, at the core of India's growth story is a somewhat different logic. Economic reforms are meant to improve competition and therefore, generate greater economic efficiency from within the system. This efficiency helps support greater employment and incomes. In other words, growth is a by-product of economic reform, whose key objectives are competition by providers and choice of consumers. The most important objective of economic reform is to encourage competition; this is possible if reforms encourage entry of new players and prevent incumbents from enjoying monopoly status and profits. But one must consider the nationalist narrative as well.

Domestic ownership could be an important criterion in areas where there is a danger of misuse or inability of the government to put such companies' assets to use in case of emergencies. None of this holds true in the civil aviation sector. In an emergency the government can easily requisition airline assets for its purpose. Hence, a limit on foreign ownership has never been a great idea in the civil aviation domain, and I have always wondered why it has existed for so long. (Perhaps it was to protect Air India from competition, but that is another story.) Allowing international entities to own airlines fully will have many advantages for the country - more flights and employment, greater competition and lower prices and therefore, greater impact on tourism and travel, and finally, higher tax revenues for the government and fees for the airports. The most important of all is greater choice for the consumer. The National Democratic Alliance government will do well to allow 100 per cent international ownership of airlines, and this should be under the automatic route.

The second important reform would be the relaxation of the 5/20 rule. Why would you want a new airline to wait for five years before it can fly international routes? Why would you want an internationally active airline out of India to have a minimum of 20 aircraft? Why would we not want an entrepreneur like Captain Gopinath to start a new low-frills international airline out of Chennai or Bengaluru? The rule was designed for incumbents to enjoy premiums that they could charge due to lack of competition. International flights are important components of an integrated world; not allowing new airlines to fly these routes is an unnecessary burden on them. They are then forced to limit their services and this only hampers service innovation, consumer choice and resultant growth.

That gets us to auctioning of bilateral landing rights. Bilateral rights are strange animals: they are artificially created monopoly instruments by governments. Being that, bilateral rights tend to increase costs for airlines and consequently, prices for consumers. An open skies policy is best, where any airline can fly to any location as long as there is place to land and park. But just like spectrum or urban land, governments have created artificial scarcities in the form of bilateral landing rights. These scarcities can then be sold or licensed as "rights" for a high price. If at all there are bilateral rights, why should they be given only to established entities? Why should they not be auctioned? The payments to government from this auctioning process can be based on revenues or passenger seats flown. This would also ensure that smaller entities are able to participate in such auctions.

The key elements of the proposed civil aviation policy reflect good economics. They are pro-competition, do not unduly favour incumbents and therefore, will generate greater employment and incomes while keeping downward pressure on costs and prices. More importantly, there will be a very large second order or indirect impact on tourism, indirect employment generation, and will be far more equality promoting than a policy that protects large monopolistic incumbents. The civil aviation sector has no credible arguments favouring ownership of airlines only by Indians or non-resident Indians. The government or the courts should not fall for their threats.

The author is an economist