Govt breaks FDI jinx with aviation

Cap hiked to 49%; foreign airlines still out in the cold.

In its first step towards liberalising the foreign direct investment (FDI) regime in the country, the Cabinet today increased the FDI cap in domestic carriers from 40 per cent to 49 per cent.

However, the Manmohan Singh government dropped the plan to allow foreign carriers to invest in domestic airlines.

The domestic aviation sector is not exactly celebrating. A section said the government's move would not result in any major benefit to the operators.

Executives pointed out that not allowing foreign airlines to invest in the domestic carriers would actually defeat the purpose of allowing foreign investment in Indian carriers.

The hike in the FDI limit was part of the proposals made by Finance Minister P Chidambaram in the 2004-05 Budget. Subsequent to which the finance ministry had proposed allowing foreign carriers to invest in domestic airlines.

According to sources, Civil Aviation Minister Praful Patel again reiterated his position that allowing foreign carriers to invest in domestic airlines would not lead to any value addition for the domestic carriers in terms of their operations or management expertise.

Besides, Patel also said if the government permitted foreign carriers to invest in domestic airlines, it would result in allowing them backdoor entry into the country.

The hike in the FDI limit, however, does not guarantee a spurt in foreign investment in domestic aviation. "The whole purpose of allowing FDI has been defeated, with the government not allowing foreign airlines to invest in Indian carriers. Even after permitting 40 per cent foreign investment about 18 months back, none of the domestic carriers has attracted any foreign investment. What difference will it make if it is raised to 49 per cent?" said Kapil Kaul, senior vice-president, Centre for Asia Pacific Aviation.

But GR Gopinath, deputy chairman, Air Deccan, welcomed the hike. "It sends out the right signals about the government's strategy on opening up (the sector). This will also help us raise cheap equity."

Airline industry analysts pointed out that countries that permitted foreign investment in the domestic aviation sector had allowed investments by foreign carriers too.

They cited the example of Australia, which allowed Richard Branson's Virgin Airlines to start operations in the country as well as in the US, which permitted 26 per cent foreign investment in domestic carriers without any restriction on investments by foreign airlines.

The government is, however, of the view that by raising the FDI cap the domestic scheduled and non-scheduled airlines will get more foreign investment and this will increase their competitiveness.

The government also approved 100 per cent investment in domestic airlines by non-resident Indians and overseas corporate bodies through the automatic route.

The Left parties said they had no objection to the government's decision on the cap hike. "There is hardly any objection because the Cabinet has decided to increase the FDI cap in domestic private airlines only," said CPM politburo member Sitaram Yechury.

The Left is of the view that despite the hike in the FDI limit, management control will remain in the hands of the domestic airline companies.

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What's the big deal about the hike?

The government thinks it will send out positive signals to international investors

International funds say the 49% limit gives them additional comfort

But... Stringent norms preventing management and operational control to foreign companies continue

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Who benefits from the move?

Domestic airlines can now divest 49% equity for more funds. Air Deccan is in talks with global funds to divest 20%

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What's the civil aviation ministry's position on the entry of foreign airlines?

Allowing foreign carriers to invest in domestic carriers will not add any value in terms of operational control or management expertise