DECEMBER 2016 EXAMINATION

DGM 02
ECONOMIC & SOCIAL ENVIRONMENT
Time: Three Hours Maximum Marks: 100

Note:

1. The paper is divided in TWO Sections: SECTION-A and SECTION-B.

2. There are five questions in SECTION-A. Students are required to attempt ANY THREE.
3. All the questions of SECTION-B (Case Study) are compulsory.

SECTION-A (20 Marks each)

1. How does the Internet affect Business Environment and the Globalization of the World
Economy?

2. Critically evaluate the demonetization of high denomination notes with their impact on Indian
economy?

3. Discuss the current Balance of Payments (BOP) scenario of Indian Economy. How does current
low export growth rate has affected Indian Medium and Small Scale Industries (MSME) sector?

4. Do you think introduction of ‘GST’ will help the business community in India? What are the
advantages of GST?

5. How increases in ‘Foreign Direct Investment’ (FDI) accelerate the economic Growth in India?

SECTION-B (40 Marks)

Case Study (Compulsory)

Privatisation of Airports and Airlines Industry

Privatisation of airports could lead to better operations and lower costs of aircraft carriers. All the
airports were fully owned by the government in India till recently. Under the new public-private
partnership scheme, more and more airports have been set up in semi urban India. The Cochin
International Airport was a project that was inaugurated in 1999, involving a partnership between the
government and the people (mainly NRIs), which functions outside the domain of the Airports Authority
of India. It has led to one of the most efficient airports in the country and mainly serves the huge
expatriate population travelling to and from Kerala. The company has made profit and broken even,
paying a dividend to its shareholders. This could be an ideal showcase project for future investments in
the airport sector?

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The competition among airports would allow airline operators to negotiate their landing prices, which
would be a great aid for low cost airlines in cutting their charges, as in the case of mature markets of the
west, which presented low cost airlines like Ryan-Air, Jet Blue (considered to be the hottest airlines in the
American Skies), South West Airlines and so on.

Similarly, the state-owned domestic and international carriers, the Indian Airlines and the Air India
dominated the airline market till recently in India. The air ticket prices were not affordable to ordinary
citizens. Although the government had plans to divest its stake in Air India and Indian Airlines initially, it
did not happen due to opposition from media and politicians. However, giving into the pressure of
liberalization, private airlines were allowed to operate in domestic routes as a first step. Due to the new
entrants like Jet Airways, the state-owned airlines started losing their market share as they lacked
technology upgradation and product offerings. Ministry of Civil Aviation in India has already adopted
many schemes for the growth and expansion of air transport. They have made new aviation policy,
which incorporated the construction of private sector airports, reconstruction of public sector airports
and purchase of new aircraft, which help the carriers to compete with the private players. The policy
would also accommodate to provide additional slots for foreign airlines at Indian airports and attract
foreign direct investment (FDI).

The Indian government has opened up their skies to the private Indian aircraft, which helps them to offer
their services internationally. As part of this policy, some of the private airlines are able to run
international flights. This ‘open skies policy’ and the entry of low cost carriers, have brought about a
boom like never before for the airline industry.

In general, the airlines industry has absolutely no control over some of the biggest expense heads
including fixed costs (in terms of leases and taxes) and variable costs (fuel and landing charges). Aviation
Turbine Fuel (ATF) constitutes close to 40% of an airline’s operating cost in India. This is almost twice that
of airlines in the West. The reason for high price of ATF in India is the huge customs and excise duty
levied on the fuel. Aviation turbine fuel is currently a monopoly of IOC (India Oil Corporation), BPCL
(Bharat Petroleum Corporation Ltd.), and HPCL (Hindustan Petroleum Corporation Ltd). The government
plans to allow private players to supply ATF, so that the completion in the market will help to reduce cost.

Although India boasts of more than 400 airports, just 62 of them are in active use, and Mumbai and
Delhi airports alone account for over 40% of the total air traffic in India. Traffic is growing both on major
routes (between metros) and ‘feeder routes’ (between smaller cities) within the country. The facilities at
Indian airports are woefully short. The poor infrastructure at Indian airports, including less space for
parking bays, maintenance hanger, check in counter space etc., is really pathetic. Two of the principles
of low-cost flying-quick turnarounds and increased aircraft utilization are very difficult to implement in
India because of the poor airport infrastructure. According to Ernest & Young industrial consultants,
India needs $10 billion (Rs. 44,000 crore) in investments to upgrade their airports.

Airports are an essential part of the air transport network. Consequently, the trend for privatising
airports is of importance to all stakeholders in the industry.

The key factor is that an airport can deliver the cost and service levels that airlines require, regardless of
the airport’s ownership structure. Therefore, where a decision is taken to privatise an airport, the
framework put in place must benefit both the industry and its customers. Privatising airports should not
be viewed simply as a short-term revenue raising option for governments. It must be seen as part of a
long-term vision for economic development.

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Investment in new airport capacity - along with more efficient usage of existing capacity - is essential if
the air transport industry is to meet future growth in demand in a sustainable way. A transparent
partnership between airlines and private sector or public sector airports is important if we are to meet
this challenge successfully.

KEY LESSONS FOR SUCCESSFUL AIRPORT PRIVATISATION

i. Customers as key stakeholders should be engaged from the outset and involved in an ongoing
and regular basis through agreed processes.

ii. A strong focus should be placed on achieving a more efficient management of the airport assets
through the transfer to private ownership.

iii. Good governance is extremely important if the privatisation is to be in the public interest.

iv. Independent, robust economic regulation is essential in order to create incentives for efficiency
improvements. Government interference in airport regulation automatically creates an
unacceptable conflict of interest.

v. The economic regulator should also be overseen by an independent Competition authority to

which airports and their customers have the right to appeal.

vi. Economic regulators have, so far, been more effective at extracting efficiencies from existing
assets rather than ensuring cost effectiveness from new investment.

vii. Mechanisms to incentivise cost efficiency must be built in to the process from the outset.
Regulation must avoid preserving monopoly profits or inefficiencies from the start.

viii. Service level agreements (or similar systems) must also be put in place to deliver a good quality
as well as a cost effective service.

ix. Controls must be put in place to prevent unjustified asset revaluations or regulatory structural
changes that burden airlines and their passengers with substantial charge increases.

x. Customer involvement in new investment is essential to ensure it is appropriate, cost effective

and delivered on time and on budget. The ‘gold plating’ of investment must be avoided.

Privatization helps more and more airports to spring up in India, which ultimately leads to better facilities
at airports. It helps to bring up more and more low-cost private airlines into this highly competitive field.
Reduction of import duties imposed, will help these airlines much, in lowering their fare also.

According to consultancy centre for Asia-Pacific Aviation (CAPA), domestic passenger traffic could grow
at a much faster rate in the coming years. By 2016, there could be 75 million Indians travelling by air,
resulting in an industry that’s Rs.50,000 crores according to CAPA. Indigo, a private Indian airlines, was

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able to draw more and more public attention by the introduction of their low-cost domestic airlines.
Indigo, Nusli Wadia’s (Bombay Dyeing) ‘Go Airline’, ‘Spice Jet’, ‘Royal Airways’, ‘Air India Express’…. thus
goes the long list of low-cost airlines. Most of the private airlines offer differentiated products and
competitive fares on first cum first serve basis, which has also worked as source for inspiration to public
sector airlines like Indian Airlines to reduce their prices.

6. Case Questions:

i. Do you think that privatization of airports would lead to more efficient management of
airport in India?
ii. Do you agree that privatizing airports should not be viewed simply as a short-term
revenue raising option for governments? It must be seen as part of a long-term vision
for economic development.

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