Reasons why 100% FDI in India's civil aviation could fail to take off

New Delhi: One step forward, two backward seems to be the mantra guiding the government while coming up with liberal FDI norms for the civil aviation sector. Two days after India’s airlines were allowed 100 percent foreign investment without any caveats except a government nod after the foreign investment limit crossed 49 percent, fresh riders have emerged. If these apply, then any substantial investment by foreign entities in India’s airline sector remains a pipe dream. [caption id=“attachment_2837572” align=“alignleft” width=“380”] Reuters[/caption] In fact, the emphasis of the government for domestic connectivity may mute global players’ desire to invest further in India. Besides new riders on foreign investment in airlines, the process to do so may be cumbersome too. Civil Aviation Minister A Gajapathi Raju has hinted at a careful scrutiny of each proposal where foreign investment could be increased to beyond 49 percent, saying the government will take a call on whether such investments are needed and then too, on a case to case basis. Why announce opening of FDI floodgates and then put barrier just ahead of the flow? Civil Aviation Secretary R N Chaubey said today that the issue of substantial ownership and effective control (SOEC) for airlines operating in India comes up at two stages - first when an airline applies for a flying permit and second when it wants to fly abroad. It is SOEC which could well put a spanner in foreign investors’ plans. In the first instance, clear rules exist mandating the majority control, board seats etc of any airline wanting to fly in India resting with Indians. To obtain a flying permit, majority control should be in Indian hands at all times. In the second case, when an airline wants to fly from India to another country, Chaubey said ICAO norms mandate that only an airline which has SOEC of Indians can fly international. For the SOEC mandate while obtaining a flying permit, the government now plans to amend the rules to accommodate the new FDI norms. Trouble is brewing over the second instance. Put simply, the second provision means that although technically an airline in India can now have 100 percent foreign investment (which could be a mix of up to 49 percent by a foreign airline and remaining by FIIs or other foreign entities), such an airline may not be allowed to then fly overseas. It may be restricted to Indian operations. One inference that could be drawn from this is that the opening up of India’s airline sector to more foreign participation is merely on paper. After all, how many foreign investors would like to invest in an airline which only flies on India’s domestic routes, never mind the near 20 percent growth potential projected for this market over the next few years? Domestic incumbent airlines Spicejet, GoAir, Jet Airways and Air India are already operating in the market and have been mostly reporting losses (except for last fiscal when benign oil prices saved them the blushes) due to the skewed taxation policy of the government over jet fuel. IndiGo is the only airline which has shown consistent profitability. Operating only domestically in India jacks up costs for most airlines due to heavy taxation, making operations unviable. More to the point, removing caps on foreign investment was seen as a bold step that should bring in funds, global expertise and best practices into India but with this interpretation of the rule, it may remain a pipe dream. It is possible that these caveats over the liberal FDI regime in airlines are meant to protect the incumbent airlines, which stand to lose the most if well-known foreign players do come and set up shop in India. According to this story in The Hindu, India has signed an air services agreement (ASA) with 109 countries. The ICAO template on air services agreements says the SOEC norms in bilateral agreements address potential concerns such as safety, security or other economic aspects including potential emergence of “flag of convenience.” However, the template is not binding and the countries are free to set their own terms. So why should India not amend the SOEC clause in each ASA as and when majority foreign owned airlines do take shape? Why create artificial hurdles right from the start? Already, two countries do not demand SOEC compliance from airlines in India before they start flying to these nations. Incumbent airlines, who have been sulking over the twin announcements - dilution of the 5/20 norm and now allowing 100 percent foreign investment in airlines - seem to have lobbied well for the changes to have no impact on their operations. All this adds up to a virtual status quo with respect to foreign investment in India’s airlines. The limit up to which any foreign airline can invest in India has been anyway retained at 49 percent, which means the acquirer does not get majority even now. But additionally, any non-airline foreign investor may have to undergo minute scrutiny from government agencies for permission to bring in funds to an Indian carrier. In an interview to CNBC-TV18, Minister Raju said “Theoretically it can. However government will have to decide on case to case type of basis whether this is really required or not. However theoretically it can, as of today it can”. He was replying to a question on whether there is now room for new greenfield carriers that can be 100 percent foreign owned? The minister also justified dilution of the 5/20 restriction instead of scrapping it entirely, saying “India is a big country and regional connectivity is the commitment of this government. To make regional connectivity happen we expect Indian players to serve India first. Indian skies are the most important thing. There are profitable routes outside, there are unprofitable routes outside, similarly in the country as well there are profitable routes and there are unprofitable routes. We would like Indian players to serve Indian skies, this is important to us. Therefore we thought that the 20 figure is a good figure and we worked around it that way.” The 5/20 restriction barred Indian airlines from flying overseas before completing five years of domestic operations and having a fleet of 20 aircraft. Now, with only the second condition applicable, new airlines may still need two-three years to come up with the 20-aircraft fleet. So here too, the government has been hesitant in announcing a complete breakaway from the past.