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Relevance: GS Paper III — Economy, Infrastructure (Civil Aviation), Energy Security Source: PIB / Union Cabinet briefing, June 2026

1 · What happened

The Union Cabinet has approved a one-time ₹10,000 crore Aviation Turbine Fuel (ATF) Price Stabilisation Fund to shield scheduled Indian airlines from the fuel-price shock triggered by the West Asia crisis.

  • The money will flow as interest-free advances to Oil Marketing Companies (OMCs) through the Demands for Grants of the Ministry of Petroleum & Natural Gas.
  • International ATF prices spiked from ₹60.5/litre in March to ₹142/litre in May (≈2.5×), while the domestic cap stood at ₹75.6/litre, leaving OMCs with an under-recovery of ₹30 per litre.
  • Faced with this squeeze, major carriers (Air India, AI Express, IndiGo) cut nearly 250 daily domestic flights from June. The fund is meant to halt that capacity erosion and steady passenger fares.

2 · How the Fund actually works

Revolving fund: Government parks a fixed corpus with OMCs; OMCs sell ATF below market; when global prices fall, OMCs return the differential to the exchequer. The corpus stays alive — not a permanent subsidy.

Institutional Anchor
Interest-free advance to OMCs
Up to ₹10,000 cr from the Centre to state-run OMCs (IOCL, BPCL, HPCL). Routed via Ministry of Petroleum & Natural Gas. OMCs supply ATF to airlines at a fixed cap.
Structural Way Forward
SAF + GST inclusion
Long-term hedge through Sustainable Aviation Fuel (SAF) blending plus bringing ATF under GST to unlock Input Tax Credit and end VAT distortion.
The Crucial Mechanism
Clawback / “true-up”
When global ATF prices moderate, the differential is recovered from OMCs and returned to the Consolidated Fund. Airlines must buy exclusively from OMCs for up to 3 years.
The Risk Driving the Fund
West Asia fuel shock
ATF up 2.5× in 2 months. Crude futures on MCX hit lifetime high ₹9,260/barrel. ATF = 40% of airline operating cost (up to 60% in volatile phases).

  • ATF outside GST: Like petrol, diesel, crude and natural gas, ATF still attracts state VAT/Sales Tax (1% to 29%) — creating wide cost gaps across states and blocking Input Tax Credit for airlines.
  • Refined-product exports squeezed: India’s refined petroleum exports fell to 9.3 lakh bpd in May — the lowest since October 2022 — as refiners diverted output to domestic demand.
  • UDAN link: High ATF endangers the Regional Connectivity Scheme (RCS-UDAN), which caps fares at ₹2,500/hour using Viability Gap Funding — fuel inflation breaks that arithmetic.

UPSC Value Box
Aviation Turbine Fuel (ATF) Specialised kerosene-based fuel for jet aircraft. ~40% of airline operating costs; up to 60% in volatile phases.
Under-recovery The gap between OMCs’ actual cost of producing/importing a fuel and the regulated price at which they sell it domestically. Pre-fund gap on ATF: ₹30/litre.
Revolving Fund A self-replenishing pool where money paid out is later recovered. Differs from a one-way subsidy because the corpus stays largely intact across cycles.
ATF & GST ATF, crude oil, petrol, diesel and natural gas are outside GST. They attract central excise + state VAT (VAT on ATF ranges from 1% to 29%). Requires a GST Council decision to bring them in.
RCS-UDAN Ude Desh ka Aam Nagrik: regional connectivity scheme; fares capped at ₹2,500/hour; gap met through Viability Gap Funding (VGF).
Sustainable Aviation Fuel (SAF) Bio-based jet fuel from feedstocks like used cooking oil, agri-waste, biomass. India is finalising progressive blending targets.
MCX Multi Commodity Exchange of India — regulated by SEBI; benchmark venue for Indian crude oil futures.

MCQ Practice Question
Q. With reference to the recently approved ATF Price Stabilisation Fund, consider the following statements:

  1. The Fund is structured as a one-time interest-free advance to Oil Marketing Companies, with the differential recovered from them once international ATF prices moderate.
  2. Aviation Turbine Fuel, along with petrol, diesel, crude oil and natural gas, has been brought under the Goods and Services Tax (GST) at the 18% slab to remove inter-state tax distortions.
  3. Under the scheme, participating airlines are required to procure ATF exclusively from the designated OMCs for up to three years or until the advance is fully recovered.

Which of the statements given above is/are correct?
(a) 1 and 2 only    (b) 2 and 3 only    (c) 1 and 3 only    (d) 1, 2 and 3

Answer: (c) 1 and 3 only

  • Statement 1 — Correct: The corpus is an interest-free advance to OMCs (not a grant). When global ATF prices ease, the differential is clawed back from OMCs to the exchequer — the classic revolving fund design.
  • Statement 2 — Incorrect (the trap): ATF, petrol, diesel, crude oil and natural gas are still outside GST. They attract central excise + state VAT/Sales Tax. Bringing them into GST requires a GST Council recommendation followed by a notification — it has not happened. This is precisely why the present crisis required a parallel fund: ITC and uniform tax rates would otherwise have softened the shock.
  • Statement 3 — Correct: The MoU between OMCs and airlines binds participating carriers to source ATF only from the designated OMCs for up to three years, or until the advance is fully recovered — whichever is earlier.

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