Indian civil aviation sector has continued to experience high passenger growth (domestic traffic CAGR is 17% from 2009 to 2011), and if the trend continues it could rank among the top three aviation markets in the world by 2020. According to Indian Aviation: Spreading its wings, a strong market growth rate coupled with infrastructure expansion will help the sector back on its feet as the economy recovers. The FICCI-PwC report also finds that this would be a good time for global players to enter India and explore the potential of a large underserved market.
However, volatility in fuel prices combined with highest tax on aviation turbine fuel and other national policy related issues continue to challenge the sector’s growth. The recent increase of FDI up to 49% in civil aviation might also not result in substantial increase in investment since it has been imposed on the aggregate of FDI and FII. The report also recommends a hike of the 26% cap on FDI in defence as it has failed to attract foreign investment. India has received only 4 million USD in the 10 years since FDI was allowed in the defence sector, while the entire economy has received over 180 billion USD.
India’s military aviation sector needs better access to technology, funding and rationalise the tax and regulatory framework to keep pace with their global counterparts. The medium and long-term perspective plans should be shared with industry in a transparent manner, without compromising on national security. This will provide the industry information and confidence to invest in a production process that is measured in decades than years.
Dhiraj Mathur, Leader - Aerospace & Defence , PwC India said: “The proactive policy regime created by the government has begun to bear fruit. We see the green shoots of the development of an indigenous aerospace and defence industry. In the last five years there have been significant investments by large and small domestic companies that has entered this industry. However, the FDI inflow has been very low at about USD 4 million. The government needs to review the 26% cap on FDI as well as streamline the various polices to promote greater investment. India’s acquisition programme and its offset policy can potentially generate investments in excess of 20 billion USD along with creating massive employment for skilled and professional manpower. The government should strive to make Indian industry an integral part of the global aerospace and defence supply chain.”
The government continues to encourage private investment in both the civil and defence aerospace sector to encourage technology transfer and achieve indigenisation. However, the ambiguity in the definition of defence equipment, inconsistencies in multiple regulations further compounded by varying interpretations of government arms create barriers for investment. The complex and multi-tiered tax structure in India makes domestic manufacturing uncompetitive and directly works against the indigenisation policy of the government.
The government also needs to create policies that will enable creation of MSME clusters with quality infrastructure and building capabilities. There are roughly 500 MSMEs across different clusters in the aerospace sector, but the clusters are fragmented and yet to evolve. The high cost of capital and business makes MSME players risk-averse and affect their ability to build innovative technologies.
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