An ASEAN sojourn for Indian aviation

• The air transport industry now supports 63 million jobs and contributes US$ 2.7 trillion to global GDP.
• India is missing out on the opportunities presented by the growth in the aviation sector across the globe.
• With the upcoming open skies policy in the ASEAN nations, Indian airlines have a strong opportunity to expand their horizons in the region.
• The Indian government must provide adequate support and cooperation to these players to explore the ASEAN market.

Creation of an energetic and competitive services sector is fast becoming a key characteristic of modern economies. For more than two decades, advanced economies are frequently accounting for two-thirds or three-quarters of services as the overall economic activities of GDP. The transition from agriculture through manufacturing to a services economy has been the hallmark of economic development for many countries.

In line with this trend, it has been noticed that many emerging markets are currently undertaking serious efforts to support and develop services industries, and to put in place the regulatory structures required for more integrated international services markets. India and the Association of Southeast Asian Nations (ASEAN) are largely following this trend to make services sector to drive their economic integration with the world economy and potential trade partners.

Many emerging economies from ASEAN region and India are currently focusing on the growth of the services sector. This is evident from the fact that India’s contribution of services sector to GDP is overwhelming and bordering around 63% (Kapoor, ICRIER 2014), thus contributing to economic activity, employment and growth.

Looking at the business potential and trade opportunities, the ASEAN region has a significant contribution of the air transport services industry to its GDP. It shows an upward and lucrative trend, marked by robust growth; particularly in certain emerging markets of the ASEAN region and more so in Singapore, Indonesia and Thailand. While the global air cargo segment still persists somewhat at abated expectations, passenger progression is showing an upward trend and air travelers are forecasted to double by 2035. The air transport industry now supports 63 million jobs and contributes US$ 2.7 trillion to global GDP.

Considering the prospects in the ASEAN region, competency levels of Indian air services and the open sky policies adopted by ASEAN countries, India is in a comfortable position to explore opportunities to provide air services in that part of the world. Therefore, with the signing of India-ASEAN agreement, India should start negotiating to take full advantage of the sector.

Of course, a substantial part of negotiations in services between ASEAN and India haven’t generated much interest, neither among industry nor government. Though both have shown keen interest in the area, governmental or industrial levels talks between the two regions have only led to understanding the potentiality. Both are convinced that the regions offer considerable opportunities, which need to be exploited.

Indonesia a lucrative market

One of the key players in ASEAN countries currently is Indonesia whose requirement in air services (air transport) is immense. The National Input Output Table provided by World Input Output Database reveals that this industry was worth US$ 2.28 billion in 2000 in terms of domestic value addition and US$ 0.44 billion in terms of imports. In subsequent years (2001 to 2005) domestic value addition and imports shrank, reducing the difference between exports and imports to almost nil.

 

From 2006 onwards, it showed a consistent rise to increase domestic consumption of air services to US$ 18.5 billion whereas the import component prevailed at US$ 0.53 billion in 2014. So, the domestic consumption of air services and import of services witnessed a CAGR of 53% and 1.2%; whereas growth in domestic consumption of air transport services was 4.01%.

India exports 10.2% of services to Indonesia among all ASEAN economies, making it a significant trade partner. But in terms of value addition in Indonesian air transport services, France and South Korea top the list and India is unable to capitalise on the opportunities thrown open by the liberalisation policies of Indonesia.

The air transport sector’s ability to bridge Indonesia to emerging countries and fast-growing cities can help drive economic growth of the connecting economy. According to data provided by Oxford Economics, there are 108 direct flight destinations among the ten fastest growing countries in the world, on the basis of GDP growth and 119 direct flight destinations among the 20 fastest growing countries. China is leading the league, by connecting maximum direct flights to Indonesia amongst the fastest growing economies followed by Vietnam and Philippines.

Indian aviation missing out?

According to the same source, there are 7 direct weekly flights among the ten fastest growing cities in the world as measured by GDP growth and over 5,500 direct weekly flights among the 100 fastest growing cities, but India is missing in capturing these business opportunities.

India has an opportunity to invest and expand the business of air transport services in Indonesia. The air transport subsector has also been a driver of service sector growth. Albeit smaller than the combined communication sectors, its GDP contributions have doubled in the last decade. Successful deregulation has again been a key driving force (Basri & Hill, 2010). This argument juxtaposes the potential for Indian air transport service suppliers. An overriding step favouring deregulation will certainly generate revenues and employment in Indonesia, and thus it could be considered by the Indonesian government as a viable or doable proposal.

The rapidly expanding demand for air transport, enhanced by the upcoming ASEAN Open Skies Policy, already exceeds the capacity of many Indonesian airports, requiring extensions and new airport developments. Since airports and airline operations are typically regarded as economically and financially viable, there is little demand for external support.

Overall, India has relative strength in some of the air services, which can be extended to the Indonesian market. It also has an advantage in terms of pricing, which can be replicated in Indonesian market if domestic players like Air India, Indigo, Spice Jet and Jet Airways are allowed to operate either through mode 3 or mode 2 or through both.

This is possible because these are considered as low-cost airlines. Besides, Indian domestic players have already ventured into foreign territories by providing competitive, just-in-time and safe services, which gives an edge in the domestic Indonesian market and other ASEAN countries. But the government needs to make a strong case to allow air passenger services to be removed from restriction under GATS.

Furthermore, as there is a requirement for building airports in Indonesia, Indian companies such as GMR can build such airports as they have done in neighbouring Philippines. This can promote India’s overseas foreign direct investment as well as establish the brand image and technological capability of Indian companies in the region and Indonesia in particular. India also seems to be having some advantages, where it can provide value added services, especially in the auxiliary services segment.

There is a scope for India’s air services to be noticed and marketed abroad. The Indian government should provide adequate support and cooperation to Indian domestic airlines to be an active player in the global airline services industry. And Indonesia, along with the larger ASEAN region, seems a good place to start.

References:

1. Air transport services includes commercial passenger services and air cargo
2. World Bank Working Paper(Air Transport Annual Report)
3. World Bank Working paper (Air Transport Annual Report)
4. With the adoption of open sky policy and timely and safe delivery of most of the Indian private airlines
5. Managed by NWO (Netherlands Organization for scientific research)
6. Based on author’s calculation by taking into account Nation WIOD database