Budget plans to make India aviation hub with aircraft financing, leasing

The government plans to make India a hub for financing aircraft purchases and leasing of planes, said Finance Minister Nirmala Sitharaman in her Budget speech on Friday.

 

India is one of the world’s most lucrative aviation markets, with a growing middle class flying for the first time, but a fierce price war among airlines and the shutdown of Jet Airways has hurt the industry in recent years.

 

"As the world's third largest domestic aviation market the time is ripe for India to enter into aircraft financing and leasing activities from Indian shores. This is critical to the development of a self-reliant aviation industry, creating aspirational jobs in aviation finance, besides leveraging business opportunities available in India's financial special economic zone namely International Financial Services Centre (IFSC). Government will implement the essential elements of the regulatory roadmap for making India a hub for such activities," said Sitharaman in Parliament.

 

She announced tax incentives, like tax deductions, for companies setting up business in IFSC for fifteen years. "This will incentivise leasing companies to set up operations here," said Dipesh Shah, head of IFSC, Gift City. 

Aviation experts said the government will have to amend tax and banking regulations onshore leasing business to take shape in India. Banks and insurance companies must be allowed to participate in leasing, and rules amended to make it easier for leasing firms to repossess planes, they said. 

 

Indian airlines have a combined fleet size of more than 600 planes and they have over 700 planes on order. A report by leasing firm Avolon last May said that around 76 per cent of the aircraft flown in India are on operating lease—the highest in the world. A majority of the lessors operate out of Ireland given its attractive tax norms.

 

Around 80 per cent of all maintenance work of airlines in value terms is carried out by units overseas and government wants to boost the sector locally. "The government will adopt suitable policy interventions to create a congenial atmosphere for development of MRO in the country," Sitharaman said.

 

The civil aviation ministry had set up working group last year to formulate policies for aircraft leasing in India.  Passenger traffic is expected to grow six fold annually to around 1.1 billion by the year 2040 while fleet size is expected to grow from 620 aircraft last March to around 2350 planes in March 2040, the ministry said its report. Plane makers Airbus and Boeing estimate India would need 1750-2100 planes valued over $ 290 billion in next twenty years. This translates to around hundred plane deliveries each year requiring $ 5 billion financing each year, it said.

 

However some aircraft lessors remain skeptical of Indian government initiatives. "India is not ready because of unreliable tax regime. A stable and tested tax and trust company regime with a long track record are key to development of of financing and leasing activities. This is not a realistic goal for India to have," remarked a head of an aircraft leasing firm.

 

MRO industry however hopeful policy reforms will help to retain business in India. "The budget announcements are encouraging. We now need to see how these translate into action," said Ravi Menon, executive director of AirWorks, a MRO firm.

 

"We welcome government intent to adopt suitable policy interventions to stimulate the MRO industry in India. This will not only boost the local MRO industry but also contribute to the government's tax revenues," said Palash Roy Chowdhury, managing director of Pratt & Whitney, India.