Indian Government Set To Renege on Commitment To Allow Foreign Investment in Airlines

 - April 30, 2012, 11:10 AM
The Indian government forced Jet Airways to buy back the 40-percent equity ownership once held by Arabian Gulf investors.

As highly taxed fuel, mounting debt and aggressive ticket pricing stifle the fledgling airline industry in India, the government seems ready to renege on its promise to allow foreign direct investment (FDI) in the country’s carriers. Current rules do not permit foreign airlines to invest in domestic carriers, although non-aviation-related investors can hold up to a 49-percent stake.

The government’s apparent intention to break its promise to liberalize the industry traces its roots to political wrangling and an effort to woo rebellious factors of the ruling Congress Party. Burdened with a combined debt of $20 billion, Indian airlines have lost $2.5 billion in the fiscal year ending March 2012, according to Australia-based consultancy Center for Asia Pacific Aviation.

“This [FDI] has always been a sensitive issue but the recent debate has been clouded by concerns about the security of funds from certain sectors,” Suzanne Rab, a partner in UK-based law firm King & Spalding, told AIN. “It is not clear, however, why such concerns should put a roadblock in the way of the more general reforms since safeguards can be put in place to require a higher level of diligence where there are concerns about the source of particular funds.”

Meanwhile, beleaguered Kingfisher Airlines, having cut its fleet from 66 aircraft to 18, has lobbied for FDI for some time. “It is regrettable that the proposals have been put on the back-burner for now at least,” added Rab. “A major concern is that some cash-strapped airlines that could benefit from FDI may not be able to weather the storm of further delay.”

Interestingly, politicians blocked a 1997 proposal by India’s Tata group to start an airline in association with Singapore Airlines even though a few years earlier Jet Airways had benefitted from a 40-percent equity contribution from foreign carriers Gulf Air and Kuwait Airlines. The Indian government subsequently insisted that Jet Airways buy back the equity stake from the Arabian Gulf investors.

In his book An Outsider Everywhere—Revelations by an Insider, M.K Kaw, India’s former civil aviation secretary, underscored the significance of the government’s move. “The history of civil aviation in this country would have taken a different trajectory, if Tata-SIA had been allowed to float an airline,” he wrote. According to Kaw, pressure from a private Indian carrier resulted in the tightening of policy on FDI.