It is not clear whether FDI is permitted for new or existing airlines.

It should have emerged as an example of the investor-friendliness of Indian Government. It should have signalled a boost for the aviation sector.

But all such hopes may come crashing down, if recent developments over the AirAsia proposal are any indication.

This is the first FDI proposal to come India’s way after the rules were changed to allow foreign airlines to invest in domestic carriers. However, it has only given rise to bickering between the ministries concerned.

EXIStING AIRLINE ONLY

The Ministry of Civil Aviation (MCA) has sought clarifications on how AirAsia’s proposal to set up an airline in India as a joint venture with the Tatas and Telestra was given an in-principle clearance by the Foreign Investment Promotion Board (FIPB).

At the heart of the problem is the wording of the policy. If one were to go by the current interpretation of rules, FDI can only be allowed in the seven scheduled carriers and various non-scheduled air transport service providers like charters. According to this interpretation, no foreign airline can enter the Indian market and start a domestic airline with an Indian partner that is not an airline.

The MCA maintains that since the three-way joint venture between AirAsia, Tata Sons and Telestra is not a foreign airline investing in a scheduled or non-schedule airline in India, it should not be allowed to set up an airline here.

Technically speaking, the MCA may have a point. The press release issued after the Cabinet changed the rules allowing foreign airlines to invest in India, and the civil aviation requirements (CAR) which notified the change in rules, can be cited in support of its position.

Both the press statement and CAR say that the Government has permitted foreign airlines to invest in Ind’an companies operating scheduled and non-scheduled air transport services up to a limit of 49 per cent of their paid-up capital.

MCA officials point out that the initial idea of moving the Cabinet note was to give a level-playing field to private airlines in India, as the Government had pumped in several thousands crores of rupees into the state-owned Air India.

FDI POLICY

The policy, which had been in the works since before the UPA-I came to power in 2004, was finally cleared by the Cabinet last September. There were two stated reasons for making the policy change.

First, with no signs of recovery in the domestic aviation sector, Indian banks were reluctant to lend to airlines that had been losing money.

The domestic airline sector reportedly ran up losses of $2.5 billion as on March 31, 2012. Second, the Government wanted to send a message to the global investor community that India was keen to move on the reforms front.

The AirAsia controversy raises some questions. Shouldn’t the policy have been water-tight, rather than one that allows for decisions to be taken on a case-by-case basis?

Should it not have included start-ups, instead of concentrating on foreign airlines investing in existing airlines? The issue of whether the new FDI policy is meant for existing or new carriers should have been settled at the outset, and not when the Government received first such proposal.

UNCERTAIN FUTURE

What will happen next is hard to say. Some believe that since it was the Cabinet that cleared the change in FDI norms, any changes now will once again have to go back to the Cabinet.

Others feel that MCA should make the changes, as it deals with the rest of the permissions for starting the airline and making it operational, such as import of aircraft and obtaining licences. There are those who feel that a mere clarification and subsequent amendment to the proposal is enough to allow AirAsia — or any other proposal which might come up at a later date — to go through.

Perhaps, the Cabinet Secretariat or the PMO can sort out the issue by sending a terse order to implement the new proposal.

It would be interesting to see what happens next. AirAsia may well be given permission to start the airline, but the damage has been done.

What should have been a clear signal that India is open to FDI in aviation has been buried in inter-ministerial wrangling.

(This article was published on March 14, 2013)
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