FDI in aviation

Anjan Roy
Of the various reforms announced last week, the removal of restrictions on investments by foreign airlines in Indian air services companies was no big reform. It was merely correcting a long-standing mischief.
The Indian aviation industry would have looked altogether different and much more mature had this anachronistic restriction not been in force. We would have seen a quality airline by now, possibly rivaling the best airline companies in the world.
The airline industry in the country would have looked more like the Indian automobile sector, which produces cars as good as ones produced anywhere in the world, turning India into a hub for certain segments of cars. Similarly, Indian aviation sector by now would have developed the capacities of serving as an aviation hub for at least the regional countries in Asia. Let me explain why.
The restriction on foreign airline companies coming into India was imposed shortly after the aviation sector started opening up after the intervention of Rajiv Gandhi. Initially, air taxi services were permitted and then scheduled air services were allowed. Many Indian companies were emerging on to the scene, including the most well-known ones of today. A proposal was mooted by the Tatas at that time to bring about a new airline, which was the most forward looking proposal and had the best financial muscles to really offer a first-class airline company services.
It may be mentioned that the doyen of the Tata group, JRD Tata, had started Air India in 1930s, when he brought back into India a small aircraft on his return journey home from Europe. The plane was booked on his returning ship as his personal baggage, as he could not fly it home for some reasons. It was later that he flew the first mail service between Bombay and Karachi in that small aircraft and thus began his tryst with aviation business. The small beginning later flourished to become Air India, which JRD personally ran until it was nationalized.
No wonder that the Tatas should have an ambition to begin afresh an airline when it was opened up for the Indian private sector.
But that was not to be. Tatas had proposed to set up their new aviation company with a foreign investor, Singapore International Airlines. By then, some of the new entrants into the aviation industry had grown their roots. One of the new airline companies saw competition there and worked overtime to stall such serious entrants. After all efforts of stymying the Tatas were exhausted, the only option was to stall it at the last moment with some restriction. Those were the days when a new minister had taken charge of the ministry and the most ludicrous restriction was put in place under his aegis – no foreign airline could invest in the capital of an Indian aviation company.
Who else could seriously invest in the capital of an aviation company other than another? But the law then spoke otherwise. Anybody could invest – a soap unit, a laundry company or an oil company. But not an airlines company. Thus was grounded the TATA-SIA airlines proposal. By the time, the convoluted restrictions were in place, JRD had gone and Mr. Ratan Tata had taken over as chairman of Tata group.
It took decades for such a mischief to be removed and now it is almost time for Mr. Ratan Tata to demit office to his successor in the Tata group. But the question will still arise: will Mr. Ratan Tata, the last protégé of the house of Tatas with that eponymous surname to lead as chairman, take the first steps to revive an airline from the group which had brought aviation into the country?
This can be important. With entry of more serious players into the Indian aviation sector, now that such investments are possible, one can look forward to emergence of quality and more stable aviation industry players. We are today integrated with the global economy so much more closely than before.
Some of the Indian companies are already active to bring in foreign airlines as investors. And ironically enough, the ones, which were most strident supporters of the restriction and instrumental in its introduction, are at the forefront today to rope in foreign airlines. At any rate, the faster it happens for them the better as moat Indian units are starved of funds.
Foreign airlines entry into Indian companies can bring in fresh funds that many of the Indian companies badly need. Airlines is an industry which needs deep pockets. The gestation periods are long and during troughs in business, it is difficult to survive unless there is financial cushion available. You also have to have large operations to gain from the economies of scale. Link up with large airlines through equity participation could provide such linkages to the Indian aviation companies.
Funds apart, involvement of foreign airline companies can improve quality of services and reliability. Airlines will have to augment their fleet size as the market is growing at a fast clip. This calls for huge investments. Besides, medium to long-term fleet sharing for airlines is a known practice and these practices help contain costs.
Such equity holding by some major foreign airlines can help promote Indian tourism industry as well. Code sharing and synchronized flight schedules can link up and offer seamless flight bookings. These can become very convenient for visiting foreign tourists. All these are benefits that the decision can bring to India. The sad thing is that vested interest denied these natural growth avenues to India’s aviation industry for close to two decades. (IPA)

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