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How to save $1 billion!

February 26, 2005

It is funny how protectionist policies work, because they usually protect the guy you didn't have in mind as a beneficiary.

Take a look, for instance, at the spate of announcements on reduced air fares and you realise who was benefiting the most from the policy of restrictive aviation rights: not our national champions Air-India and Indian Airlines, but British Airways and Lufthansa and Emirates and all the others who have been milking Indian passengers.

Waking up to the threat of fresh competition from newly recognised players like Jet and Sahara, and realising that the Indian customer will now have the benefit of genuine choice, most of the established airlines have slashed fares by up to 50 per cent, so that you can now fly to London for less than Rs 20,000.

Even after making allowances for the fact that this is the slump season (being also the exam season in India), and that traffic will pick up in the summer months (and fares might go up then), it seems reasonable to assume that the average fare will have dropped by about 25 per cent simply because the skies have been opened up by a civil aviation minister who understands business.

Some 6 million Indians travel overseas each year. If you take the average fare that each of them pays as being about Rs 30,000 (the off-peak cost of a round trip to London), and assume a 25 per cent saving on this fare from now on, we are looking at shaving off travel costs by about Rs 7,500 per head; or, a total of Rs 4,500 crore (i.e. a billion dollars) being saved by all 6 million people.

This is many times more than whatever notional loss Air-India and Indian Airlines (supposedly the beneficiaries of the old policy) will suffer in the new regime.

In any case Air-India is launching its own low-cost airline, Air India Express, with new aircraft and freshly hired crew on less generous terms, and slashing fares to West Asia by between 30 per cent and 40 per cent, if their station managers overseas are to be believed.

So it may well stay ahead of the game.

Now, a billion dollars each year is money saved mostly in foreign exchange. It is enough to buy all the new planes that the new airlines have been talking of, so in a national accounting sense the country is getting its new aircraft free.

Then there is the additional benefit that will flow from cheaper fares on India routes: more foreign travellers will drop by, instead of flying on to Bangkok.

This will be helped by new airports and a proper tourism infrastructure (whenever they come), but the important point just now is that India is seen as an expensive destination and that can change.

Indeed, open up aviation another step by allowing more charter flights, and you will see the big travel companies offering genuinely low-cost India packages. India today gets fewer tourists than almost any south-east Asian destination that you can name.

Double the number of incoming tourists, from 3 million to 6 million, and the spin-off benefits will be immense. Starting with lots of jobs.

The underlying point is a well-known one that bears repetition: protectionism usually ends up protecting the wrong guy. It could be the producer, at the cost of the consumer. And it may not be the producer you have in mind.

India has long believed that its textile policy is protecting more than 30,000 small-scale garment manufacturers, but the real beneficiary has been China, which has walked away with the world's market.

Now the majority of those 30,000 garment manufacturers will be out of business anyway because the global market is only interested in volume suppliers, but there is no point trying to protect them because playing the volume game in textiles will create an estimated 15 million jobs in the next seven years, as India's textile industry expands.

So let's take a bow to Praful Patel for doing what needed to be done, and to the guys who negotiated the new textile trade package 10 years ago (and who were pilloried by all those Leftists for allegedly having sacrificed India's interests at the WTO negotiating table).

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Sub: Air India and Competition

Air India service is so horrible that they should go bankrupt. If they take full fare from me and can not even serve me a ...

Posted by Mahendra Kothari


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