The demented aviation fuel policy of the Indian Government

The tumultuous last week in the Indian aviation scenario, which rivalled the best soap opera dramas of Bollywood, Tollywood or Sandalwood, shows no signs of abating.

The popular joke of the day is “Who says there is a CREDIT crunch in India? See all the politicians taking CREDIT” [for ‘protecting’ the jobs of the Jet Airways staff].

The fight between Petroleum minister Murli Deora and Civil Aviation minister Praful Patel, both from Mumbai, spilt out in the open, with the Oil ministry charging airlines with default, and Patel defending the ‘defaulter’ airlines.

According to Press Trust of India (PTI) report, Civil Aviation Minister Praful Patel recently defended delays by airline companies in making payment of their fuel bills saying they were not defaulters, but the Petroleum Ministry maintained that Jet Airways had defaulted on payment of Rs 259 crore to Indian Oil Corporation (IOC). Rs. 100 Crore = Rs. 1,000 million = $20 million.

After Petroleum Ministry gave details about the dues of Jet Airways and its new found ally Kingfisher Airlines, Patel told reporters in the Parliament that the airline had a 60-day period to make payments. “So they cannot be branded as defaulters,” said Patel. However the Petroleum Ministry countered Patel by saying that Jet had failed to make payments even after expiry of the 60-day grace period. Jet’s total outstanding to IOC stood at Rs 859 crore, of which it had defaulted on payment of Rs 259 crore bills, which were due on September 25 and October 5 this year after the expiry of 60-day period, said a senior official.

Similarly, Kingfisher owed Rs 110 crore to IOC, of which Rs 60 crore remained unpaid after expiry of the credit period. Jet also owes Rs 284.3 crore to Bharat Petroleum Corporation Limited (BPCL) while Kingfisher owes Rs 246 crore to BPCL and Rs 525 crore to Hindustan Petroleum Corporation Limited (HPCL). The official further said, “It is not correct to say that we are terming them defaulters just like that. We said they were defaulters because they failed to make payments even after 60-day credit period.”

Petroleum Minister Murli Deora had personally brokered the 60-day credit deal between Naresh Goyal’s Jet Airways and Sarthak Behuria, Chairman, IOC. Deora said last week that he was hurt when Goyal did not keep his word on making timely payments.

The official said both Jet Airways and Kingfisher Airlines had to clear their outstanding at the earliest as state-run oil firms themselves were in difficult times. “Our companies have a social obligation to fulfil. They sell subsidised cooking gas to households and even more subsidised kerosene to the poor. They have been living on borrowed funds and need funds to keep these subsidised sales going,” said the official. IOC, BPCL and HPCL together lose about Rs 280 crore on sale of petrol, diesel, domestic LPG and kerosene. “Do you now expect them to sell subsidised fuel to the rich travelling by air?” he said. {This statement reflects the demented thinking of the ultra-smart people, so often found in Government, I have been raving about. Please see my article on how the populist fuel policy of the Indian government is killing Indian aviation.}

The completely lopsided, and vote-grabbing, populist mindset, of both, the Union and various State governments, have left the Government controlled oil companies in shambles. The three companies have not received oil bonds, which are used to compensate for half of the losses they make on fuel sales, for past three quarters. The combined borrowings of the three, which stood at Rs 48,400 crore in March 2007 and Rs 66,900 crore in March 2008, has increased to Rs 1,10,000 crore ($2.2 billion) as of this month. The oil companies are forced by the governments, to lose, Rs 2.85 a litre on petrol, Rs 7.26 a litre on diesel, Rs 29.19 a litre on kerosene and Rs 335.03 per cylinder on domestic cooking gas. The companies are projected to lose Rs 1,47,592 crore ($3 billion) in revenues this fiscal.

The official further informed that Aviation turbine Fuel (ATF) was priced at import parity rates (as if the fuel were to be imported) because around 80 per cent of the crude oil used to make the fuel was imported at international rates. Pricing of ATF was de-regulated on April 1, 2001 and since then it has been governed by fluctuations in the global market. Over the base price, customs duty of five per cent, eight per cent excise duty, three per cent education cess and sales tax at an average of 25 per cent is levied. State taxes and excise duty amounts to about a third of the ATF price.

In the meantime, PTI also reports, Jet Airways Chairman, Mr. Naresh Goyal, met with Finance Minister P Chidambaram to seek tax concessions on aviation turbine fuel as part of measures to overcome the crisis that has hit the Indian civil aviation sector.

According to sources, Goyal met Chidambaram at North Block this morning and drew attention of the finance minister to the problems that airlines in the country were facing. Goyal is understood to have asked Chidambaram to consider the demand of airlines to rationalise taxation and levies on ATF, which has become one of the biggest issues of carriers in India.

It is a known fact, that Mr. Chidambaram does not have any maneuvering room, given the raft of populist measures taken during this financial year, keeping in view the upcoming general elections.

In true television drama style, keep watching for the next episode.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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