Recently, government allowed 49 percent FDI in the civil aviation sector, in order to rejuvenate the chronic sick industry of the country. Though earlier also FDI in civil aviation was allowed but foreign airlines were barred from investing in domestic airlines.

 

Foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services. The Government has now permitted foreign airlines to invest, under the Government approval route, in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49 percent of their paid up capital.

 

Connectivity is the backbone of today's global economy as it brings people to business, tourists to vacation destinations and products to markets. All are important to India's development. Instead of flourishing and delivering economic benefits, India's aviation industry is struggling and recovery is hampered by high taxes, insufficient infrastructure, high costs and restrictive investment policies. 

 

In year 2011-12, except Indigo, all airlines have posted losses. Kingfisher Airlines, which is burdened with a debt of over Rs 7,000 crore, has been in the forefront of pushing for permission to allow foreign airlines to invest in domestic carriers. Most of the Indian carriers are suffering losses because of high taxes on jet fuel, rising airport fees, costlier loans, poor infrastructure and cut-throat competition.

 

Indian aviation is overtaxed. There is 12.36 percent service tax on air tickets and services that airlines purchase such as landing and air navigation. On the top of it, aviation turbine fuel (ATF) is also heavily taxed. Globally, fuel accounts for about 34 percent of an airline's cost structure while in India, because of high taxes, it accounts for 45 percent. ATF in India is priced, on an average, 60% higher than international prices.

 

Apart from taxes, the rising costs at airport are also hampering the health of aviation industry. Few months back, Airports Economic Regulatory Authority (AERA) approved a 346 percent increase in the charges at Delhi's Indira Gandhi International Airport, placing it among the world's most expensive airports. These increased costs are likely to reduce passenger air travel in a year by between 7 percent and 10.5 percent.

 

Though Kingfisher Airlines has been pushing for FDI to boost the sector, Jet Airways and IndiGo have expressed reservations saying allowing global players in would lead to cartelisation and takeovers of Indian carriers. However, with 49 percent cap, takeover by foreign carriers is unlikely to happen.

 

Now the question is whether FDI in domestic airlines by foreign airlines will be able to change the fortunes of the sector or not. Given the fact that except for Indigo, all airlines posted losses in the past fiscal, there are genuine problems with the sector some of which are already discussed. While on one hand, poor infrastructures, high airport charges, lopsided tax structure and cut throat competition are plaguing the industry, inefficiencies in the management of few airlines cannot be ruled out. In 2011-12, Indian carriers posted a combined loss of 12,000 crore. 

 

Many analysts doubt the ability of foreign airlines to rejuvenate the domestic airlines as most airlines are facing losses due to higher costs and taxes. In such a scenario, why would any airline come to India unless it has a viable business model that would give a strategic advantage?

 

The problem of the industry right now is of profitability and not investment-related. The profitability-related issues need to be addressed, which clearly cannot be done by foreign carriers as they cannot change the tax or the fare structures here. In such a scenario, it is unlikely that a foreign carrier will accept the liability of Rs7000 owed by Kingfisher Airlines. Earlier in 2001, when Government of India tried to sell out the loss making national carrier, it had no takers and disinvestment plans were shelved due to the absence of buyers.

 

Despite aforesaid apprehensions, there is no doubt that aviation sector will certainly get the benefits with the capital infusion. Allowing FDI in aviation would pave way for much-needed equity infusion in Indian carriers, which were in dire need of funds. 

 

Foreign carriers such as British Airways and Virgin Atlantic Airways Ltd already have expressed interest in investing in Indian carriers. Further, there has been a need to consider financing options available for private airlines in the country, for their operations and service up gradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country's aviation infrastructure.

 

Irrespective of the ability of foreign carriers to rejuvenate the aviation industry, FDI by foreign airlines in domestic airlines is a welcome decision. India's airlines need capital to grow. While the 49% cap on foreign investment aligns with general practice globally, the complete exclusion of foreign airlines from investing in Indian carriers is unique to India.

 

Given that foreign airlines could own 100% of mass rapid transit systems, ports, hotels, toll roads or tunnels, the restriction makes little sense alongside India's other foreign investment policies. Moreover, there are indications of policy reforms in the aviation sector as Ministry of Civil Aviation Bill in the winter session of Parliament to set up of a Civil Aviation Authority which would revamp the aviation regulator. 

 

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