The government’s regional connectivity scheme (RCS), by the name of Ude Desh ka Aam nagrik or Udan, is ill-conceived and reminiscent of the policies formulated in the heyday of socialism. Which is sad because it tells us that Prime Minister Narendra Modi, who has shown some initiative in the domains of national defence and foreign policy, remains stuck in the Nehruvian quagmire when it comes to the economy.
Statism is writ large on Udan. The fare for a one-hour journey of approximately 500 km on a fixed wing aircraft or for a 30-minute journey on a helicopter would now be capped at Rs 2,500, with proportionate pricing for routes of different stage lengths/flight duration, said an official release. Any policy with price caps or administered prices is anti-reforms. It ends up introducing distortions in the sector and corruption in the system.
The government, however, is gaga about Udan. Minister of State for Civil Aviation Jayant Sinha said that this scheme would “ensure affordability, connectivity, growth, and development. It would provide a win-win situation for all stakeholders—citizens would get the benefit of affordability, connectivity, and more jobs.”
The Minister went on to point out that his government would be able to expand the regional air connectivity and market. “The state governments would reap the benefit of development of remote areas, enhance trade and commerce and more tourism expansion.” For incumbent airlines, there is the promise of new routes and more passengers, while for start-up airlines there is the opportunity of new, scalable business. Airport operators will also see their business expanding as would original equipment manufacturers, the official release said.
It seems like a new era would dawn with Udan; but it is more a flight of fancy than an innovative initiative. For the basic principle—that is, providing a facility at a price determined by government rather than market—is deeply flawed. Cheaper regional flights, according to the official release, “would be achieved through (1) a financial stimulus in the form of concessions from Central and state governments and airport operators, and (2) a Viability Gap Funding to the interested airlines to kick-off operations from such airports so that the passenger fares are kept affordable.”
Typically, the Central government “would provide concessions” in the form of reduced excise duty, service tax, etc. “State governments will have to lower the VAT on ATF [aviation turbine fuel] to 1 per cent or less, besides providing security and fire services free of cost and electricity, water and other utilities at substantially concessional rates.”
Further, airport operators shall not impose landing and parking charge and terminal navigation landing charges; there would be discounts on route navigation facility charges. “A Regional Connectivity Fund would be created to meet the viability gap funding requirements under the scheme. The RCF levy per departure will be applied to certain domestic flights.”
Aviation Secretary R.N. Choubey has reportedly said that “a very nominal” levy would be laid for the purpose. It has been estimated to be over Rs 60 per ticket. Whether airlines absorb it or pass it on, fully or partially, to their customers, it would be forced cross-subsidization.
On the face of it, Udan is about nice things—affordability, connectivity, economic development, and employment generation. But all unsavory elements of socialist policy—over-regulation, subsidies and cross-subsidies, concessions, fiscal sops, political and bureaucratic discretion—are the defining features of Udan. And these will, sooner or later, result in the same abominations as earlier statist policies did—stifled growth, market distortions, corruption, and unanticipated pitfalls.
In this context, it would be instructive to recall the calamity that the erstwhile freight equalization policy occasioned. It was adopted in 1952 for a laudable objective: equal growth of industry across the country. Transportation of minerals was subsidized by the Central government, so that the regions not endowed with natural resources did not suffer.
The result was that the resource-rich eastern states were deprived of the competitive advantage. The business houses like those of the Tatas, who set up industries in eastern India during British times, felt no need to invest more in these states. Coastal states such as Maharashtra, Gujarat, and Tamil Nadu flourished, while the naturally rich region languished. Though the policy was abandoned in 1993, the eastern region is still suffering the consequences of the monstrous statism of the policy.
Udan has the potential of becoming a similar monstrosity. Therefore, the government would be well-advised to dump or drastically alter this policy.