Budget 2026-27: Tax relief for aviation, uncertainty for UDAN

The government announced customs duty exemptions on aircraft components and a new seaplane subsidy scheme in Budget 2026 to boost India's aviation sector. But what the budget overlooks is a deeper issue: the Regional Connectivity Scheme (UDAN) continues to bleed public funds by subsidising routes that commercial logic cannot sustain.

The budget exempts basic customs duty on components and parts used in the manufacture of civilian and training aircraft. Raw materials imported for aircraft maintenance, repair, and overhaul (MRO) by defence units will also be duty-free. To “enhance last-mile connectivity,” the government will incentivise seaplane manufacturing and introduce a Viability Gap Funding scheme for seaplane operations.

Also read | Budget 2026: Business as usual in a world that is not

Yet UDAN—the flagship regional connectivity programme—received just ₹550 crore for FY27, nearly the same as last year's ₹540 crore and sharply down from the ₹789 crore actually spent in FY25. This allocation falls woefully short of the scheme's ambitious targets: connecting 120 new destinations and serving 4 crore passengers over the next decade.

The subsidy treadmill

Since its 2017 launch, UDAN has operationalised 657 routes connecting 93 airports, including 15 heliports and two water aerodromes. It has served 1.6 crore passengers on over 3.27 lakh flights. Under its first three phases, UDAN has awarded 774 routes. The government proudly cites India's airport expansion—from 70 in 2014 to over 160 today—as evidence of historic transformation.

But look at what's not working. Of the 774 routes awarded, only 52 per cent—roughly 400 routes—actually commenced operations, according to a 2023 CAG audit. Of those who started, only 112 completed the full three-year subsidy period. And of those 112, only 54 routes—seven per cent of all awarded routes—sustained operations beyond the subsidy window.

The government has disbursed approximately ₹4,500 crore in viability gap funding since 2017. For that investment, India has a sustainability rate of less than 50 per cent, meaning over half of subsidised routes are discontinued within 3-5 years once subsidies expire.

Why routes fail

UDAN operates on a simple principle: airlines bid for routes by stating the minimum subsidy per seat needed to make the route viable. The government pays this subsidy to bridge the gap between operating costs and capped fares of ₹2,500 per flight hour.

But there is a fundamental problem: A Delhi-Shimla flight costs airlines ₹5,000-7,000 per passenger to operate (aircraft lease, crew, fuel, airport charges), but passengers pay ₹2,500 for a 60-minute flight. The subsidy covers this gap for 50 per cent of seats, assuming airlines sell the remaining 50 per cent at market prices.

But tier-2 and tier-3 cities often lack sufficient demand. A route from Shillong to Kolkata or Nashik to Mumbai might attract 30-50 passengers daily, barely filling one small aircraft. Without demand, even subsidised seats go unfilled, and the route becomes unviable despite government support.

Seasonal variations worsen the problem. Pilgrimage routes see spikes during festivals but empty cabins off-peak. Tourism routes face similar volatility. Airlines cannot profitably operate year-round on demand that fluctuates 5-10 times between peak and off-peak seasons.

The tax relief illusion

The customs duty exemptions sound impressive but do not address the real issues. India doesn't manufacture aircraft, it assembles them. What passes for domestic “manufacturing” involves importing 85-90 per cent of components duty-free, performing final assembly locally, and claiming “Made in India” credentials.

Exempting 5-10 per cent basic customs duty saves $1-3 million per aircraft. But if the aircraft contains 90 per cent imported content, India captures only $3-4 million in value addition through assembly labour. The duty exemption essentially subsidises foreign manufacturers to conduct final integration in India rather than abroad.

Also read | Budget 2026 focuses on AI, digital education but concerns over inequalities remain

True aircraft manufacturing requires metallurgical capabilities for airframe-grade alloys, engine design and fabrication, avionics integration, and certification infrastructure meeting international airworthiness standards. India lacks all of these.

The MRO duty exemptions are more meaningful. India’s MRO market, valued at $1.5-2 billion annually, sends 80-85 per cent of work abroad to Singapore, Dubai, and Sri Lanka. Exempting MRO raw materials from duties saves 10 per cent of component costs—helpful, but marginal compared with structural disadvantages such as higher hangar rentals, skilled labour shortages, and regulatory delays.

Seaplanes: UDAN on water

The seaplane initiative replicates UDAN’s flawed model. The government proposes incentivising seaplane manufacturing and creating a VGF scheme for seaplane operations to connect rivers and coastal areas.

Seaplanes cost $2-7 million depending on size, with operating costs of $800-1,200 per flight hour. Water aerodromes require ₹15-25 crore in infrastructure, including floating jetties, passenger terminals, refuelling facilities, and rescue services. The budget allocated ₹122 crore for water aerodrome development across 48 proposed routes—just ₹2.5 crore per site, enough for basic infrastructure but not full-service facilities.

The Sabarmati Riverfront-Statue of Unity seaplane route in Gujarat, operational since 2020, averaged 8-12 passengers per flight despite heavy marketing. When subsidies lapsed in 2023, operations became sporadic. This pattern will repeat across 48 routes unless structural demand exists, which for most routes, it doesn't.

Seaplane VGF will likely subsidise ₹3,000-5,000 per passenger, given high operating costs and low volumes, and will consume ₹150-200 crore annually if targets materialise. For that investment, the government could build more all-weather roads in hilly regions, benefiting citizens there multiple times.

What aviation actually needs

India's aviation sector has genuine needs that Budget 2026 doesn’t address. The fact that key metro airports are all privately run doesn’t help. What is needed are secondary airports that the government can establish through its own initiatives and funding. The secondary airports will, to a large extent, reduce concentration at metro airports, ease traffic, and enable the growth of smaller airlines, which can be offered various incentives to sustain their operations.

India needs 15,000-20,000 additional Aircraft Maintenance Engineers by 2030. Building 10 world-class training centres would cost ₹1,500 crore and produce 2,000-3,000 AMEs annually, solving MRO's biggest constraint. Establishing comprehensive turbofan engine overhaul capability would cost ₹3,000-4,000 crore but repatriate $800 million-1 billion in annual MRO spending currently going abroad, creating 5,000-8,000 high-skill jobs.

Instead, the government allocates ₹550 crore for UDAN—90 per cent below what's needed to meet stated targets—and announces seaplane subsidies destined to replicate UDAN's failures on water.

The real story

UDAN persists not because it works, but because it creates visible symbols of government action—airport inaugurations, ribbon-cutting ceremonies, press releases about “democratising air travel.” That these airports often sit idle two years later is politically irrelevant.

Also read | Budget leaves TN feeling snubbed ahead of polls; 'no projects', says Kanimozhi

True regional connectivity requires demand-led planning, not subsidy-driven experimentation. It means rationalising UDAN to 50-100 genuinely viable routes, shifting from airline subsidies to direct consumer vouchers for underserved populations, and accepting that aviation isn’t the solution for many regions where improved road and rail connectivity would be more cost-effective.

Budget 2026’s aviation package delivers politically attractive but economically marginal interventions—duty exemptions worth ₹300-500 crore annually, UDAN allocations far below requirements, and seaplane schemes repeating proven failures. Therefore, it is important to review the entire aviation infrastructure and allocate adequate resources where needed.