Cruise control

Opening civil aviation to FDI should be gradual

At one level, the move to allow foreign airlines to invest in domestic carriers can be viewed as a transparent attempt to bail out Vijay Mallya’s profligate Kingfisher Airlines and the deeply troubled (and even more profligate) state-owned Air India. At another, it might just be the tonic that the cash-strapped Indian aviation business needs to stay aloft and open the Indian skies to global competition. Either way, the issue the Cabinet will consider shortly is far trickier than votaries for a wholesale open skies policy may suggest. For one, there is the question of foreign control. The department of industrial policy and promotion under the industry ministry favours a 26 per cent limit on FDI or even 49 per cent and the aviation ministry 24 per cent, the two percentage point difference representing the managerial power the foreign investor needs to block a special resolution or not. This, in fact, has been a key reason the more successful domestically-owned airlines have been consistently opposing the move, for which lobbies have been active on Raisina Hill for several years.

Although opening civil aviation to FDI will undoubtedly help the consumer (by the simple expedient of creating more competition) and the investment climate suggests it could help existing airlines as well, there is a strong case for the government to exercise caution. That’s because India’s aviation industry is still in its infancy. Bar a couple of them, no airline is making profit, for reasons ranging from artificially high aviation fuel and infrastructure costs to acute competitive pressures. Several have only just begun to spread their wings in overseas destinations, both long- and short-haul. Allowing airlines with deep pockets and long-established brand-names to fly in as dominant shareholders, therefore, might be both disruptive and unfair to a domestic industry that has sunk considerable capital into building their airlines. Although other industries have demonstrated their ability to withstand foreign competition (insurance and telecom being two notable examples), the industry ministry’s proposal to limit FDI to 24 per cent is probably a good way to start, after which the government could consider progressively raising the limits.

Those who have argued for a higher limit suggest that foreign airlines are unlikely to be attracted by a shareholding limit that would imply they will put in money but not have management control. This was the same argument that was made for the insurance sector, for which the FDI limit is 26 per cent and, despite constant lobbying for a 49 per cent cut-off, every major global insurance company has set up base in India. The same holds true for the aviation business. At a 20 per cent annual growth, the Indian aviation industry is among the world’s fastest growing. Given the slowdown in the major economies of Europe and the US, the Indian market remains an attractive proposition. Given that, it makes sense to allow FDI to address the cash-flow problem that domestic airlines are facing, without wiping out their competitive abilities. As industry after industry has demonstrated, there is much to be gained from FDI; it is equally important that it is accepted on terms that suit India and Indian industry rather than the other way round.