Providing a major thrust to the Indian airline industry, the Union Budget for 2012-13 proposed that the sector be allowed to raise capital through external borrowings worth one billion dollars for a year even as it recommended allocating Rs. 4,000 crore to the cash-strapped Air India.

In a bid to encourage maintenance, repair and overhaul (MRO) sector, this year’s budget proposed to allow full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment.

Presenting the budget proposals in Lok Sabha on Friday, Finance Minister Pranab Mukherjee acknowledged that the airline industry was facing a financial crisis. “The high operating cost of the sector is largely attributable to the cost of Aviation Turbine Fuel (ATF). To reduce the cost of ATF, Government has permitted direct import of ATF by Indian carriers, as actual users,” he said.

In a bid to address the immediate financing concerns of the civil aviation sector which is facing capital crunch, the Finance Minister proposed permitting “External Commercial Borrowings (ECBs) for working capital requirements of the airline industry for a period of one year, subject to a total ceiling of one billion dollars”.

In another move that could bring cheer to the ailing civil aviation sector, Mr. Mukherjee said that a proposal to allow foreign airlines to participate in up to 49 per cent equity of an airline company, operating scheduled or non-scheduled services, was “under active consideration of the government”.

While the central plan outlay for Civil Aviation Ministry in 2012-13 is estimated at Rs. 7,293 crore, a demand for plan allocation of Rs. 4,000 crore to Air India in the next financial year has also been proposed in the budget.

As a sop to Indians travelling abroad, he also proposed to raise the duty-free baggage allowance, which was last revised in 2004, from Rs. 25,000 to Rs. 35,000 and for children of up to 10 years from Rs. 12,000 to Rs. 15,000.

In a bid to augment long-term low cost funds from abroad for the infrastructure sector, the budget also proposed tax incentives for funding certain infrastructure sectors, including those Indian companies involved in aircraft operations.

‘A step forward’

Anil Khanna, managing director of Blue Dart Express, said the proposal to allow domestic carriers access to ECB’s up to $1 billion for a period of one year and active consideration of allowing 49% equity participation by foreign airlines and allowing direct import of ATF, would give much-needed relief to the sector.

“It is heartening to note that the Government recognises that India has the potential to establish itself as a as third party MRO hub and has granted a full exemption of basic customs duty and CVD on aircraft spares, tyres and testing equipment,” said Mr. Khanna.

Vivek Gour, managing director of Air Works, a major player in MRO field, said the budget announcement of full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment was “a great forward looking step” by the Government.

In his reaction to the proposal, Mr. Gour said: “this puts the Indian MRO industry on a level playing field and with its international competition in the region. For us, it will help us attract business from airlines within five hours flying distance from India.”

However, the MRO industry in India still has to charge its customers service tax of 12% which none of its competitors in the Middle East, Sri Lanka or South East Asia have to, Mr. Gour said.

Aviation analysts felt that some of the measures in Budget 2012-13 that will bring down input costs for the airline industry which has been burdened with mounting losses. When implemented, the proposals would help in making India competitive in the international maintenance and repair of aircraft.

Cash-strapped private carrier like Kingfisher and Naresh Goyal-promoted Jet Airways and other domestic airlines can now look to raise working capital from abroad as the ECB window was open for one year with a ceiling of $ 1 billion. So far, the airlines were allowed to raise foreign capital only for import of capital equipment like aircraft.

Ankur Bhatia, Executive Director of the Bird Group, described the budget proposals relating to the aviation sector as “positive”. He said that ECB to recast the debit was beneficial for Indian banks and would work for airlines to reduce the interest burden. “Concession on MRO setup will make India very competitive in this sector,” he said adding that 49% of FDI in aviation industry which was still under consideration might impact the overall growth of the sector.

Welcoming the Budget proposals, Mr Dhiraj Mathur, Executive Director and Head of National Aerospace and Defense Practice, PwC felt that airlines will now have to factor in the currency risks when going in for ECBs to refinance their high cost working capital. “While the announcements on the MRO sector will move India closer to the existing MROs in the region greater clarity is need on some issues including what will count as export of services,” he said.

However, Dr. Jyotsana Suri, Chairperson and Managing Director of the Lalit Suri hospitality group, said the hospitality and tourism industry has once again been overlooked in the budget proposals. “Our industry is heavily burdened with multiple taxes like luxury tax, VAT and different States levying different taxes. And now there is further increase in service tax by 2 per cent and the excise duty has been hiked too. This would adversely affect the growth prospects of the industry and result in higher cost to the consumer,’’ she said in a statement.

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