Modi's ambitious Udan scheme needs transparent costing

The Udan scheme intends to revive air travel between 43 regional airports and metropolitan hubs

Prime Minister Narendra Modi last week flagged off the first flight, on the Shimla-Delhi leg, of the government’s new scheme to boost regional air connectivity. The Ude Desh ka Aam Naagrik, or Udan scheme, is intended to revive air travel between 43 regional airports and metropolitan hubs. The aim is laudable. In many cases, regional airports are decaying. The new plan intends to create demand for these routes by auctioning them to a new set of regional airlines. The routes are being made viable by subsidies to airlines of various sorts. Half the seats on each flight will be sold at a subsidised rate, with a price cap of Rs 2,500 for a one-hour flight. Operators have been chosen based on whether they quoted the lowest subsidy — or viability gap funding — per seat included in the scheme. It is hoped that this will increase the scale of the regional air network and lead to incorporation of these regional centres into the larger economy. Minister of State for Civil Aviation Jayant Sinha told a conference that about 100 new airports were also envisaged as being created in the coming years.

 
However, some basic questions must also be asked about the design of the scheme. First of all, as with any scheme that creates a new subsidy in the hope that a market will grow, are the sunset clauses built into the scheme adequate? Ideally, as air travel takes off, the need for the subsidy should go away. The good news is that Udan has some sunset clauses and renegotiations built in, as well as a cap on viability gap funding. However, what is not yet clear is if the structure makes such processes easy to enforce, or if the sunset clauses are comprehensive enough. There are also reasonable questions to be asked about the exact cost of the scheme to the exchequer. The explicit viability gap funding that is being provided, according to the civil aviation ministry, is not large at about Rs 205 crore a year. But this considerably understates the actual costs. Many other steps that have fiscal implications have been taken in order to make the flights viable and to induce bids from new regional airlines.

 
For one, the tax on aviation turbine fuel for these flights has been reduced to a nominal level for at least the next 10 years. What does this do to the finances of states such as Delhi that have done so? Indirect taxes on the flights have also been reduced. What is the impact of this concession? Second, landing and navigation charges have been waived for flights under Udan. Who will compensate airports for the lost revenue? Is it open to legal challenge by private airport concessionaires in future? The cost of the scheme also ignores the decision to pump in Rs 4,500 crore to upgrade infrastructure in some regional airports. Once all the costs are lumped together, the cost per subsidised passenger may be considerable. The question to be asked then is: If airline passengers receive high subsidies, how can anyone demand an end to passenger subsidies on Indian Railways?