Needless subsidy

Use funds with Airports Authority of India for regional air links

The Union civil aviation ministry's intent to improve regional connectivity cannot be faulted, but the way it has planned to go about it raises many questions. The draft policy on regional air connectivity, released last week, is a complex web of price controls, cross-subsidy and viability gap funding (VGF) by the government: the kind of things a regime that believes in "minimum government and maximum governance" should have nothing to do with. The scheme talks of a tariff cap, which will be linked to the distance covered. If the airline loses money on these flights, it will be compensated out of the Regional Connectivity Fund, which will be created out of levies collected from passengers on other routes. In other words, those who travel on existing sectors will subsidise the travel of people on un-served routes. Apart from the fact that it will cause airfares to go up on all busy routes, this is patently unfair. Needless to say, the existing airlines are not overly enthused by the suggestion. Also, this has set the clock back by a few decades: a business cannot be started just in anticipation of a subsidy.

Experience suggests that such cross-subsidies seldom serve their purpose. Sugar is a good example: for many years, the government sold sugar to ration card holders at a discounted rate; but there was massive pilferage and market prices tended to stay high. The whole idea of making the commodity available at low prices was defeated. What is more alarming is that the civil aviation ministry has come up with this idea of taxing fliers when the Airports Authority of India is sitting on a pile of cash. Not just the fliers, even the private airports will be required to share the load: the draft of the scheme says that all airports will not collect landing and parking charges from such flights. In addition, the Centre as well as the states will have to give fiscal incentives to regional flights.

Calculating the VGF is not going to be easy, especially when jet fuel prices turn volatile. Also, different aircraft have different costs of operation, which means that the subsidy will have to be calculated afresh for each flight. There are bound to be quarrels over inclusion of certain costs and revenues while calculating the VGF. It is fairly easy to imagine a scenario where the regional airlines and the civil aviation ministry waste a lot of their time and energy over such disputes.

This is not the first time that the ministry has come out with a policy to boost air connectivity to smaller cities and towns. In 2007, when the United Progressive Alliance was in power, a similar policy was mooted with much fanfare, but it failed to take wings.

The Airports Authority of India, if it wants, can upgrade airports that are currently unused. But it is imprudent for the government to intervene in the market and direct traffic to these airports. If there is a market, the airlines will tap into it anyways.