ECONOMIC REFORMS AND THEIR IMPACT ON CIVIL AVIATION. CIVIL AVIATION - AN ECONOMIC CATALYST. WIDER SPIN-OFF BENEFITS.

Transcription

1 ECONOMIC REFORMS AND THEIR IMPACT ON CIVIL AVIATION ECONOMIC REFORMS AND THEIR IMPACT ON CIVIL AVIATION. CIVIL AVIATION - AN ECONOMIC CATALYST. WIDER SPIN-OFF BENEFITS.

2 CHAPTER - 4 ECONOMIC REFORMS AND THEIR IMPACT ON CIVIL AVIATION During 1990 the Government of India started a partial open sky policy to allow select charter flights in and out of India, services by private air taxi operators (ATO) in the domestic market and subsequently other scheduled airlines to compete with the National Carrier. The private sector entrepreneurs who could survive the turbulence of a newly liberalised transport sector have captured a higher than 25 % share of the total domestic aviation market and a larger share of the traffic passing through the five International airports. This has been achieved at the cost of the Government owned national airlines. A somewhat open sky policy also facilitated clearing of cargo piled up at the airports and greater inflow of tourists into the country. However, the real beneficiary of this change has been the Indian consumer who has a relatively greater choice and accesses to any airline that guarantees better service and performance. Various factors that can affect the growth or decline in demand for air transport are, growth rate of gross domestic product (GDP), industrial growth rate, number of tourists, cost of travel in real terms, Plus global factors such as economic boom or recession in countries that are India s trading partners, overseas marketing of India as a tourist destination, regional factors such increasing economic linkages among the Asian nations, local factors such as special economic incentives for businesses and industries to locate in certain areas of the country, or disincentives such as political instability, industrial unrest, etc. Moreover, supply-side factors are also important in determining the potential size of the market. These may include infrastructural facilities such as airports, aircraft maintenance capabilities, efficient communication system, rational customs and GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 51

3 immigration procedures, etc. which, to a large extent determine the flow of capital into this sector. Last but not the least, as appropriate Civil Aviation policy and a proper regulatory system must be in place to encourage healthy and sustainable competition in the aviation sector and to allow it to grow in a steady and balanced manner. To assess the potential size of the aviation market in India, one must consider the likely impact of ail of these factors in greater detail. Economic reforms that have been put in place in India during 1991 have already boosted the rate of growth in real Gross Domestic Product to above 5% and the industrial growth rate to about 12%. It is forecasted by many responsible agencies such as the National Council of Applied Economic Research (NCAER) and the World Bank that if the ongoing economic reforms are not derailed, India's GDP growth rate in the long run could continue to be in the 5-8 % range. This, in turn, will have a significant impact on the demand for air transport, both in passenger and in cargo segments. Besides economic reforms in India, the current world economic trends are also going to have important impact on growth of the Indian aviation sector. Some of the relevant world trends are summarised below With increasing economic linkages between India and Asia-pacific countries that are currently being set up, the air travel between India and these countries will go up significantly. The passenger traffic in Asia-pacific region is expected to grow by 7% per annum between 2000 and 2010, accounting for more than half of the world market by In the context of the above facts, one realizes that the size of the Indian air transport industry will depend upon a pyramid of factors, some of which are driven by general market forces, some are extraneous over which one cannot have much control. But there GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 52

4 are still many factors-mainly on the supply side, which can be influenced by appropriate aviation policy, coupled with continuation of economic reforms that are currently under way. Given the current International and national scenarios, the past will not be a good guide for the future market size of the Indian travel industry. Standard forecasting techniques must be supplemented by reasoned judgment to get a range of forecasts about the future. The recent trend in India s GDP, Particularly since the economic liberalisation process began, economic survey of Govt, of India indicates a steady rate of growth during The recently announced economic policy of the new United Front Government projects an average annual rate of growth of 7%. Which is also generally consistent with other forecasts made by national bodies like the National Council of Applied Economic Research (NCAER) or the Center for Monitoring Indian Economy (CMIE), and International institutions like the world bank. The Business Outlook survey conducted by the confederation of Indian Industry also support such an optimistic growth rate for the economy. Given this outlook and given the demand elasticity estimate presented above, the market for air transport sector in India should grow at a conservative rate of about 13-15% per annum. A major factor pushing India s economic growth rate is expected to be a significantly higher level of exports in the next decade or so. During 1991, India s exports and imports have both been going up steadily. The new Government has also set an achievable target of 20% annual growth in exports. Near about 40% of India s exports move by air, the impact of continued rise in exports as well as imports on the demand for air transport is obvious. Except a dip in 1991, International cargo traffic has been growing steadily over the last decade. A 20 % annual growth in exports is likely to maintain at this moment, the growth of cargo traffic over the next decade also, particularly with increasing trade between India and other Asian countries. GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 53

5 A major stimulus to growth in air traffic is provided by foreign tourist arrivals. In India s case, 98 % of foreign tourists arrive by air. However, foreign tourist arrival is still at a very low level in India. It might be primarily due to infrastructural constraints such as hotel and resort facilities and lack of appropriate promotion of India as a world tourist destination. The economic reforms and liberalisation policies are expected to change this. There is a steady rate of growth during the beginning of the liberalisation process. The growth is likely to accelerate in future if some of the constraints mentioned above are removed. When one takes into consideration the potential effect of expected economic resurgence, higher push for exports, higher levels of foreign tourist arrival and business traffic, etc. The confidence in this projected range of annual growth rate of % for the air transport sector in the medium to long term future, goes up significantly. To develop a realistic outlook for the industry, however, the technical forecasts about market size must also be supplemented by some judgmental considerations that will take into account any economic fluctuations in India s major trading partners, pertinent political factors, and last but not the least, the supply-side factors. Based on the arguments, explanations and their modifications as presented above, one can zero in on a 10 % average annual growth for the total air transport market, for a relatively pessimistic case, 13 % for the most likely case and 15% or above for a optimistic case. The supply side constraints as mentioned above to a large extent will determine or limit the actual size of the air transport market. If these constraints cannot be fully removed, or eased, the actual market size may be much smaller than the potential stipulated above. The supply side constraints can be removed or eased, only through a rational Civil Aviation policy and other ancillary GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 54

6 policies of the government. It appears in retrospect that the process of partial deregulation of the air transport industry was introduced without a clear Civil Aviation policy, which could provide unambiguous signals to the potential private sector participants about the government s objective. Naturally, the present policy led to widespread confusion and ad-hockism in decision making. As a result, serious private sector investment and commitments are yet to come into this sector. Air transport is recognised the world over as a major contributor to national and world economic growth. On a worldwide basis, in 1994, travel and tourism contribution to total employment was 10.6 % (i.e. one in every nine new jobs), to GDP 10.1%, capital investment 10.7% and corporate and personal tax 11.7%. The study forecasts that travel and tourism will double in size in the next decade. The overall economic contribution of Civil Aviation, including air cargo, would be substantially higher than these figures. The Economic Survey, , concludes, services are becoming the most important source of new job opportunities" and includes tourism as one of the key areas for creation of productive jobs. For India, tourism industry is also the third largest foreign exchange earner. 4.1 CIVIL AVIATION- AN ECONOMIC CATALYST : Air transport is one of the world s most important services. Its development and its technical and service achievements place air transport as one of the greatest contributors to the advancement of modern society. Since the first jet airliner flew in 1949, use of commercial aviation has grown more than seventy-fold. This growth is unmatched by any other major form of transport. Air transport is essential for economic progress. In an increasing global community and marketplace, air transport makes it GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 55

7 possible for the rapid movement of millions of people and billions of dollars worth of goods to markets around the world. The industry plays a decisive role in the work and leisure of hundreds of millions of people. The industry includes the suppliers and operators of aircraft, engine manufacturers, fuel suppliers, airports, and air traffic control systems. Its customers come from every sector of the World s economy and from every segment of the world s population. In every region of the world, countries large and small depend on the aviation industry to stimulate their economic growth and their financial strength. In 1998 the industry provided at least, 28 million jobs for the world s workforce and US$1,360 billion in annual gross output. Air transport drives economic progress and in turns benefits from it. Air transport acts as an economic catalyst, promotion leisure, and business activities, contributing to growth and increasing efficiency. 4.2 CIVIL AVIATION -A GROWTH INDUSTRY: Air transport remains one of the fastest growing sectors of the world economy. Passenger and freight traffic is expected to increase at an average annual rate of around 4-5 % between 1998 and Which is significantly greater than the growth of global GDP. By 2010 the number of people travelling by air could exceed 2.3 billion each year. In an increasingly global society, the contribution of the industry to the world s economics to grow day by day is significant. By the year 2010 aviation s economic impact could exceed US$ 1,800 billion. With over31 million jobs provided. By any measure air transport is a major economic force and a source of enormous wealth. GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 56

8 More than 1,600 million passengers were carried by the world s airlines in Over 29 million tonnes of freight was transported by air in 1998, representing approximately 40 % by value, of the world s manufactured exports. North American airlines fly about 40 % of the world s total passenger traffic, whilst European carriers account for 26 % and carriers in the Asia/ Pacific region24 %. An annual turnover of US$307 billion was generated by airlines in 1998, a figure higher than the GNP of many national economies. More than 3.9 million people are directly employed by the industry throughout the world. Nearly 1.5 million people in the US alone work in the air transport sector. The world s airlines have a total fleet of about 18,000 aircraft operation over a route network of approximately 15 million kilometers and serving nearly 10,000 airports. Air transport provides the foundation for International tourism, with over half of all International tourists, apart from those travelling within Europe, travelling by air. A) Civil Aviation Generates Wealth: The total economic impact of aviation on gross world output amounted to at least US$1,360 billion in This figure comprised US$ 320 billion in direct impact, US$390 billion in indirect impact and US$ 650 billion in induced impact. B) Aviation Generates Employment: The total economic impact of aviation on the labour market is estimated at nearly a 28 million jobs in This total includes the direct employment of nearly 4 million people in the industry, over 8 million people who are employed indirectly by the GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 57

9 industry 2/3 of them in Europe and North America alone and an induced impact conservatively estimated at more than 15 million people. C) Aviation Generates Taxes: The air transport industry pays substantial amounts of taxation to local, provincial, and national governments around the world. Passengers and shippers pay taxes on their air transportation tickets. Whilst aviation employees pay income taxes on their salaries. In the United States alone, for example, the annual federal user taxes and fees paid by airlines in 1998 are estimated at more than US$ 9.2 billion, of which almost three quarters are in the form of passenger ticket taxes. In addition, airline employees in the US paid over US$ a2.2 billion in pay roll taxes alone. D) Aviation Generates Travels Tourism: Aviation is at the heart of the travel and tourism industry, now the worlds largest irdustry. By 1999 travel and tourism supported approximately 192 million jobs, or 1 out of every 12 workers in the world. According to figures compiled by the World Travel and Tourism Council for 1999, the travel and tourism sector with around 625 million customers each year, is expected to generate an annual gross output of roughlyus$3.550 billion, about 12% of the worlds total GDP. By^> ^ 2010, the level of travel and tourism employment is forecast to rise to over 250 million jobs, with an expected annual gross output of around US$6,800 billion. 4.3 WIDER SPIN-OFF BENEFITS: Above and beyond all of these quantifiable economic benefits, commercial aviation also generates a whole host of less tangible spin-off" benefits. These include reducing the cost of trade GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 58

10 and movement, attracting new business to locations with good air service links to the rest of the world, and support for the developments of new technology and distribution processes based on the rapid movement of people and goods. In addition to the quantitative and qualitative contributions of the air transport industry, aviation also acts as an economic catalyst by - I) Providing a new and faster mechanism for distributing goods and services throughout the world. II) Contributing to growth in existing industries. III) Increasing overall economic efficiency. IV) Air transport reduces the cost of trade and opens up new market opportunities by moving products and services quickly over long distances. V) The availability of air transport has created entirely new industries, such as the export of fresh tropical fruits from Latin America and the Caribbean to Europe. VI) Air transport has generated an enormous increase in tourism to remote and developing regions. For example. In Asia, countries such as Thailand, and more recently Vietnam, has benefited form significant growth in tourist derived income. VII) Economic efficiency is increased by the ability of airlines to deliver stock, equipment, and personnel anywhere in the world within 24 hours. VIII) Just in time manufacturing practices would be unthinkable without air transport, particularly for companies, which incorporate foreign-sources components and materials in their products. GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 59

11 IX) Companies operating significant regional sales and after-sales, service and support functions would be severely constrained without ready access to air transport. X) International business opportunities are enhanced by facilitating Personal contact with dispersed operations and long distance Markets. XI) The development of electronic communication means, including The Internet as a base for worldwide electronic commerce relies heavily on complementary delivery services of high reliability and speed, such as those provided by express airfreight companies. Refrences: - Tridib K. Biswas.Macroeconomic outlook for the Air Transport Industry: Up to year 2003, paper presented for National Conference on Indian Air Transport Industry - Towards year ' July International Air Transport Association- the Economic Benefits of Air Transport, 2000 Edition, paper prepared for Air Transport Action Group; pp. 8 to 13. GROWTH AND DEVELOPMENT OF CIVIL AVIATION IN INDIA - A STUDY AFTER LIBERALIZATION 60