Current account of balance of payments — practice question

Read the source material closely before answering Question 1. Source material: India’s airline industry Air India is government-owned in India. As fresh firms have entered India’s air transport market, Air India’s power to choose prices has weakened. The state-owned airline competes not just with rival airlines but also with other transport modes such as trains and ships. In 2017, the Indian government made an unsuccessful attempt to sell Air India to the private sector. If that sale had succeeded, the Indian government would have gained revenue and the airline might have become more efficient. Forecasts suggest that by 2025 India will have the third largest airline industry. Growth in the industry may influence India’s current account position in its balance of payments. Table 1.1 shows the current account position in India and four other countries. More routes and a better passenger experience may lead to more tourists travelling to India. A larger Indian airline industry is likely to make it easier for people and goods to move into and out of India. This could draw in more multinational companies (MNCs) and lower firms’ production costs. India’s air transport market has several difficulties. India has the highest airline fuel tax in Asia. Some economists argue that this should be raised further to boost tax revenue and cut market failure. Other airline costs are rising, yet it is difficult for airlines to increase fares because Indian air passengers are among the world’s most price-sensitive. Some airlines prevent costs from rising further by improving staff training, adopting new technology and improving pilots’ working conditions. The ability of airlines to recruit pilots depends, among other things, on the quality of education and the availability of other jobs.