Did Ajit Singh eat someone else's lunch? The ATF non-rescue

Trust the government to come up with a solution that's worse than the disease.

Faced with the threat of airline companies going under due the high cost of aviation turbine fuel (ATF), newbie Civil Aviation Minister Ajit Singh emerged from his bathtub earlier this month with 'Eureka' on his lips: Let our airlines import their ATF directly, he said. A empowered group of ministers (EGoM) agreed.

Problem solved?

Fat chance. Singh and EGoM forgot several things. Among them:

First, since ATF is sold at market prices, direct imports means reducing one of the few profitable lines of business for oil companies. When oil companies lose money, the bill lands up with Pranab Mukherjee. Wonder how the FM let that pass.

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[caption id="attachment_216420" align="alignleft" width="380" caption="Earlier this month, the civil aviation minister permitted our airlines to import their ATF directly."][/caption]

Second, producing less ATF may also mean producing less of many other petrofuels. The oil companies do not produce ATF in isolation. The refineries extract several fuels from crude distillation simultaneously - when they produce less of a middle distillate like ATF, they may have to cut output of petrol or diesel, too, as this article in The Economic Times explains.

Third, the savings in ATF price is not a free lunch for the airline industry. The industry will actually eating someone else's chow - and not just the those of oil companies. ATF costs more because the states make a lot of moolah from taxing it. Current sales tax rates vary from 4-32 percent. According to a BusinessLine report, states fear a loss of Rs 3,000 crore in sales tax if airlines import it directly. (No ST is levied on direct imports). But the states may just change the sales tax into an entry tax and nullify the advantage of direct imports.

The moral: you cannot have a free lunch at the cost of someone else and hope to get away with it. Even if every troubled airline is at your door, bowl in hand, you need a real solution. (Kingfisher, Air India and Jet have all asked for bailouts).

Over to you, Mr Ajit Singh. It's back to the bathtub.