Has GDP growth taken off? October's spike in domestic air traffic may hold a clue

October's spike in domestic air passenger growth can be seen as a multiplier effect of a rebound in economic growth, which has remained subdued for six consecutive quarters.

This begs the question of whether last month's 20.52% jump in the number of people flown by local airlines reflected revival in gross domestic product (GDP) growth or was it just a blip caused by Diwali rush.

In the computation of air traffic growth in an economy, GDP growth rate is generally taken as a multiplier. Analysts and aviation experts usually apply the thumb rule that air passenger growth rate in a developing economy is around 2.5-3 times of GDP growth rate while in developed country it grows at the same rate as the GDP.

Going by this formula, October's over four percentage points (bps) jump in growth rate of domestic flyers from 16.43% in September could well be reflecting a turnaround in GDP growth, which slipped to 5.7% in June quarter.

Kapil Kaul, CEO South Asia and Middle East, Centre for Asia Pacific Aviation (Capa), would rather attribute the sudden rise in air passenger growth to capacity induction and attractive fares than to see it as merely an outcome of economic growth.

But his projection of 20% growth in the domestic air passenger is based on expectation of a 6.5%-7% growth in India's GDP.

"The first half of the current fiscal had lower than 20% growth because aircraft, owned by IndiGo, were grounded and some aircraft delivery being deferred. For H2 (second half), whether it is IndiGo or Go or others, the aircraft that were grounded have come back in service and the fleet induction is as planned. So, whatever was not inducted in H1 will get inducted in H2 and as a consequence of that we will get 19%-20% growth for H2 for this year. Full year guidance of Capa is closer to 20% now," he said.

The Capa chief said due to aggressive supply in the second half of the current fiscal, the number of flyers is likely to grow at a swifter pace than before even if GDP growth remains low.

"As of now, even when the economic growth is coming down, (air) traffic was growing closer to 20%. It is largely because the capacity induction has been aggressive and fares attractive. The maximum GDP-air traffic multiplier effect is 2.5 times but India is an exception because of supply (induction of aircraft). We are looking at 6.5%-7% economic growth, based on that we expect air passenger growth rate to be closer to 20%," said Kaul.

Pankaj Pandit, Bangalore-based aviation analyst, also said it would be too early to conclude that the number of flyers scaling up in October denotes economic revival. He, however, believes that if number of domestic air passengers showed similar growth trend in coming month then it would surely mirror a revival in GDP growth.

For now, he believes the upswing in number of domestic flyers could be attributed to Diwali or festive rush.

"As Diwali this year came in mid-October, the October air traffic is showing a big jump at 20.5% (up from 16.43 in September). Last year, Diwali came in the end of October and therefore its effect on traffic got divided between October and November, and so, October (2016) figure was underreported. However, if we were to see this high growth trend to continue it will be reflected in the GDP growth too," he said.

Since the fourth quarter of fiscal 2016, GDP – which had shot up to 9.2% - has been tumbling. It fell to 7.9% in the first quarter of the last fiscal, only to further dip to 7.5% in second quarter and then to 7% in the third quarter. The fourth quarter of the last fiscal saw it sink to 6.1%. In the first quarter of the current fiscal, it came at sub-6% at 5.7%.

Tandemly, the local air passenger growth has also flown downwards, except for one blip. From the 24.03% growth in the fourth quarter of FY16, it dropped to 21.12 in first quarter of FY17. Going against the trend, it firmed up in second quarter of last fiscal at 24.75% but declined again to 22.95% in the next quarter. Since then, air passenger traffic growth, like GDP, has moved only southwards to 21.81% in the fourth quarter of last fiscal, 17.49% in the first quarter of current fiscal and 13.49% in the September quarter.

A tweet by Capa India on Monday also predicts domestic air traffic to grow at 20% in the second half of the current fiscal. Based on the GDP-air traffic multiplier theory, one can deduce that the GDP growth could be seen coming at 8% in the same period.