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India is splurging big time on airlines, roads & railways. Let’s just hope it all pays off

No Indian airline makes money, railways' passenger traffic is stagnant, and roads have a revenue imbalance problem. At some point, traffic growth will have to justify the investment.

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India’s transport sector offers a strange mosaic of stagnant traffic trends, poor or negative returns, and yet unprecedented levels of investment for the future. After years of vast sums being ploughed into all forms of transport, the next two or three years could see the results of that investment in the form of transformational change in the air, on highways and expressways, and in the railways. Here’s hoping.

But the paradoxes don’t go away. No Indian airline makes money, and the rise of “incidents” in the air has raised concerns about safety, while passenger air traffic is just about back to pre-pandemic levels. 

Yet, investment in new airline capacity has never been more ambitious. Akasa is about to take off as an “ultra-low cost” carrier, and has ordered 72 aircraft. Indigo as the sector leader has some 275 aircraft and about 700 on order — but unhappy staff chafing about pay cuts. 

On their part, the new owners of Air India (which hasn’t ordered new aircraft since the infamous one in 2006) are contemplating massive refurbishing of the fleet with an order for 300 planes (the current fleet strength is about 120).

The fresh orders could total up to nearly twice the country’s current aviation fleet of about 665 aircraft. The planes on order will come in stages, and many will only replace existing aircraft. But this scale of capacity creation is almost certain to exceed demand growth, so expect pressure on fares — and therefore more losses, especially if oil prices stay high and taxes where they are. One or more of the existing airlines could well go belly up, following the trail of Jet, Kingfisher, and others.

Also Read: The LIC way or the Air India way — that is the multi-crore disinvestment question

Similarly, the railways are investing like never before — close to 1 per cent of gross domestic product (GDP) annually. They are progressively introducing “semi-high speed” passenger trains that will average 100 km per hour (up from today’s 70 kmph for express trains), feel-good initiatives like Vistadome coaches on scenic routes, and a major programme for upgrading railway stations. 

Change will come slower than desired because the dedicated freight corridors (on to which a good bit of current freight traffic is to move) have made slow progress and massively overshot the initial cost estimates. But comfortable travel on reasonably fast inter-city trains could be on the way to reality, and eventually compete with airlines on the shorter routes.

The paradox once again is that this is against a backdrop of stagnant passenger traffic, which is hugely loss-generating, painfully slow growth in freight traffic, and overall finances, which barely bring revenue level with expenditure (helped by some flexible accounting). These trends may change, but annual railway investment is now as much as revenue. Almost none of the investment is from operational surpluses, and a good bit is coming from external resources, which could translate into mounting debt; the bulk of the investment will continue to come as budgetary support.

As for roads and highways, annual investment is about half what it is for the railways (or 0.5 per cent of GDP), but the imbalance with revenue is much worse, with investment being about nine times earnings. Before the investment splurge began, investment and revenue were about equal. But as the country moves from highways to expressways, and develops inter-modal traffic nodes and port linkages, the country’s perennial infrastructure deficit is finally being addressed. Truck traffic is reported to have speeded up on the new highways, with the introduction of goods and services tax helping the process, but the distance moved in a day by the average truck remains well below what it is elsewhere.

Return on investment is not the primary metric for decisions on investment in a country’s transport infrastructure, which is why it is usually funded out of the Budget and not commercially. But since substantial private funding is required for the transport infrastructure, it is relevant that India has come through a half-decade and more of low or no growth in traffic across sectors. At some point, traffic growth will have to justify the investment, or the government’s asset monetisation programme will not deliver the expected numbers. Again, here’s hoping.

By special arrangement with Business Standard

Also Read: For India, economic disorder is a reality to be reckoned with, but it also presents an opportunity


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