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Uncertain Impact of the 2016 FDI Reforms on the Civil Aviation Sector in India

by EOS Intelligence

Uncertain Impact of the 2016 FDI Reforms on the Civil Aviation Sector in India

by EOS Intelligence

by EOS Intelligence
382views

Indian aviation industry is aiming high and intends to grow at a fast pace. Studies forecast that India could become world’s third largest aviation market by the end of this decade. In June 2016, the Indian government opened doors to 100% foreign investments in the Indian aviation sector. With an aim to establish one of the most FDI liberal economies across the globe, the government has taken steps to ensure easy and smooth inflow of foreign currency to India. This move has triggered mixed reactions – some raised their eyebrows while others welcomed the change.

With the objective of driving growth in the local aviation market, spurring airport infrastructure improvements, as well as giving the employment sector a push and creating new jobs in the country, the Indian government announced amendments to the FDI policy for the aviation sector. Under the new regulations, 100% FDI is allowed for both greenfield and brownfield projects through the automatic route. Regulations have been updated also in other categories of aviation operations. In Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Service, though Non-Resident Indians continue to be allowed to invest up to 100% FDI without any approval, foreign investment is capped at 49% under the automatic route and any investment beyond this share must go through the government approval route, however allowing for the possibility of 100% FDI by only non-airline players. This effectively maintains the previous limitation for foreign airlines to bring in only up to 49% of the capital in Indian carriers operating scheduled and non-scheduled air transport services.

1-FDI Reforms In Indian Civil Aviation

Under substantial ownership and effective control, any foreign airline that invests in domestic carriers via non-airline investors, is bound to have an Indian chairman and at least two-thirds of its directors of Indian origin, so that majority of the ownership rights are vested in the hands of Indian nationals. Indian Civil Aviation Ministry say that though the new provisions allow full investment of foreign parties in the national aviation sector, 100% foreign ownership dominated airlines will still not enjoy the freedom to fly internationally. International investors can own full stakes only in domestic airlines but will have to bear the heat of the government procedures and approvals to fly overseas. Though the new changes in the policy give hope to increase the ease of doing business in the country thus increasing FDI inflow, a question still remains why an international carrier would enter the Indian market to operate primarily on the domestic front. Also, owing to heavy debt, high input costs, and rigid competition, most of the domestic players are already registering business losses, so whether a new entrant in this segment would earn profits is rather questionable.

EOS Perspective

Foreign air carriers face various hindrances when planning to enter the Indian civil aviation landscape. The leverage offered currently by the Indian Civil Aviation Ministry allowing 100% foreign direct investment in the sector may look rosy but it comes with fine print, i.e. despite allowing 100% FDI, the regulators still kept several limitations, effectively reducing the attractiveness for foreign players to invest in India.

The relaxation in the FDI norms is likely to attract many overseas carriers to invest in existing airlines that were looking to expand their operations in India. The deteriorating financial condition of domestic players is expected to improve with investment from foreign players.

Improved service standard, professionalism, and adoption of industry best practices are likely to be seen in existing air services within the country. Nevertheless, a doubt still remains whether these amendments in the FDI regulations that aim at boosting the aviation sector will really be fruitful.

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