Budget for Aviation Sector

In the Union Budget 2012-13, Finance Minister, Pranab Mukharjee has proposed external commercial borrowings (ECB) for the sector in the new financial year with a cap of $1 billion. The airline industry will benefit from this move as it helps to shave off high costs of borrowings for airlines.

At present, loans carry an interest rate of about 11-14%, which is a huge drain on airline resources. Airlines, if the proposals are accepted will get access to capital for running daily operations at about five percent to seven percent, resulting in a saving of about five percent in interest costs alone.

In a bid to encourage the nascent maintenance, repair and overhaul (MRO) sector, it also proposed to allow full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment. While, in 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.

On the other side, no announcement for foreign carriers to invest up to 49% in the domestic carriers was made in the Budget. But, the industry is hopeful that the government will open up the civil aviation sector for foreign investors in a few months. At present, the government allows FDI up to 49% in Indian carriers by non-airline players but does not permit foreign airlines to invest directly.

Overall, the Budget 2012-13 has neutral impact on the Industry as increase in service tax will impact negatively on the industry while, ECB with holding move could reduce interest costs and provide much needed liquidity and would ease pressure in short term, while paving the way for FDI in aviation sector at a later stage.