Originally published in the Winter Issue of BLG Aerospace News
The growth potential in India’s aviation industry is tremendous and, bolstered by one of the world’s fastest growing economies, this is just the beginning of its rise as a serious international player.
With the recent increase of the foreign direct investment cap in domestic airlines from 40% to 49%, the Indian government has signaled its interest in boosting growth in the aviation industry by encouraging foreign capital to be pumped into the sector, in a bid to increase its efficiency and global competitiveness. Even as foreign individuals and companies are allowed to hold stakes in Indian airline companies, non-resident Indians and foreign firms in which they hold at least a 60% share, are allowed to hold 100% stakes in domestic Indian airlines.
Historically, high fares deterred many in India from travelling by air. However, with the recent growth of low-cost carriers across Asia and particularly in India, there has been a surge of first-time air passengers using popular domestic low-cost carriers like Air Deccan. Full service carriers like Jet Airways and Air Sahara have also joined in the action by adopting new strategies to combat low-cost competition, for example, by introducing cut-price fares on a proportion of seats on their full service flights. As air travel is now more affordable and accessible, the domestic aviation industry is slowly tapping into the pool of potential passengers who hitherto relied on rail as the cheaper alternative.
The Indian government has in recent times also increased its support of local private carriers, as can be seen from the slight relaxation of the monopoly enjoyed by Air India and Indian Airlines on foreign routes. The Indian government would have to strike a balance between support for Air India and Indian Airlines as well as the private carriers, creating a more vibrant, competitive and liberalised aviation industry, which would be a draw for investors and travellers alike.
An area which will have to be looked into is the improvement of an infrastructure which is currently inadequate to meet the anticipated rate of growth. Redevelopment plans are in the works for airports in Mumbai and Delhi, with the government looking to private sector investment to support these modernisation projects.
However, one disappointment with the recent government directives is the continued reluctance of the government to lift the ban on foreign airlines from having a share in domestic carriers. The government is anxious to prevent management control falling to the hands of foreign investors and is concerned that an influx of foreign airlines into the local market too soon might hinder, rather than assist, the growth of local airlines.
This protective policy can be argued to be necessary given the newly-awakened state of India’s aviation industry, but with the foreign airlines’ ever increasing interest in taking a share of the domestic airline action, the Indian government will have to become more flexible in order to synchronise with the dynamics of the global aviation arena.
Undoubtedly, the door to a stake in domestic Indian airlines will not be closed to foreign airlines forever. As Aviation Minister Praful Patel has noted, the current policy barring foreign airlines from buying stakes in domestic carriers is only temporary and could be reviewed in the next couple of years, once carriers have strengthened their presence.
Still, the increasingly active aviation industry in India is one which should be watched, and with Indian airlines gradually finding their feet – both domestically and in the global market – it is to be hoped that government policy will become more supportive and encourage further investment in the industry, even from foreign airlines.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Nishith Desai Associates is a research-based Indian law firm with offices in Mumbai, Silicon Valley, Bangalore, Singapore, Mumbai BKC, Delhi and Munich that aims at providing strategic, legal and tax...
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).