FDI in the Civil Aviation Sector in India

To revive the country’s chronically ailing civil aviation industry, the government has approved 49 percent foreign direct investment (FDI). The 49 percent cap will cover both FDI in civil aviation and FII/FPI investment and other types of investment. Even though FDI in civil aviation had previously been permitted, foreign airlines were not allowed to invest in local carriers.

Firms operating cargo planes, helicopters, and seaplane services were allowed to participate in the stock of foreign airlines, but not companies running scheduled and non-scheduled air transportation services. Under the Government clearance route, international airlines can now invest up to 49 percent of their paid-up capital in Indian enterprises that operate scheduled and non-scheduled air transportation services, thanks to FDI in civil aviation.

State of the civil aviation sector in India

In today’s global economy, connectivity is essential since it delivers people to work, visitors to locations, and products to markets. All of these are crucial to the progress of India. India’s aviation sector is failing, and recovery is hampered by high taxes, inadequate infrastructure, escalating expenses, and restrictive investment laws that make it difficult for the business to thrive.

IndiGo Airlines was the only airline to make a profit in 2011-12. Over Rs 7,000 crore in debt, Kingfisher Airlines has led the charge to allow foreign airlines to invest in Indian carriers. Due to hefty taxes on jet fuel, growing airport fees, expensive loans, and weak infrastructure, most Indian airlines are losing money.

Air traffic in India is congested. Tickets and services purchased by airlines, such as landing and air navigation, are subject to a 12.36 percent service tax. Aviation turbine fuel (ATF), on the other hand, has a hefty tax burden. Fuel accounts for about half an airline’s cost structure worldwide, with hefty taxes in India. ATF is 60 percent more expensive in India than it is elsewhere.

The Need for FDI in Civil Aviation 

Foreign airlines’ FDI in civil aviation is becoming the subject of debate. Considering that all other airlines apart from IndiGo reported losses in the previous fiscal year, the industry faces real issues. Some of these were:

• substandard infrastructure
• steep airport fees
• skewed tax arrangements 
• cut-throat competition 
• inefficiencies in management

During the 2011-12 fiscal year, airlines in India lost a total of Rs 12,000 crore.

According to many observers, the probability of international airlines reviving local airlines is doubtful because most airlines are losing money owing to rising expenses and taxes. Isn’t it obvious that a sustainable business strategy with an edge is the only reason an airline would come to India in this situation?

The issue facing the sector at the moment is one of profitability, not one of investment. Profitability is a major issue that international airlines cannot solve because they can’t modify tax or pricing systems in this country. For instance, the Rs 7000 crores owed by Kingfisher Airlines is unlikely to be taken up by a foreign airline. In 2001, when the Government of India sought to sell the loss-making national carrier, no bidders were found, and the disinvestment plans were put on hold.

However, there is little question that the aviation sector will greatly profit from the influx of new money. Allowing foreign investment in the aviation sector will help Indian airlines that desperately need capital.

• British Airways and Virgin Atlantic Airways Ltd., two well-known international airlines, have previously indicated an interest in making investments in Indian airlines. 
• Private airlines in the nation and their operations and service upgrades necessitate consideration of funding alternatives that are accessible to them. 
• Many domestic airlines may go out of business if they are denied access to foreign funding. This would pose a systemic risk to financial institutions and leave a critical gap in the nation’s aviation infrastructure.

FDI by international airlines in local airlines is good, regardless of their capacity to revive the aviation industry. Capital is needed by Indian airlines to expand. Even if foreign airlines are barred from participating in Indian airlines under worldwide practice, the 49 percent foreign investment restriction is a first in India.

Sale of Air India 

The Tata Group will take over Air India, ending the government’s attempts to privatise the national airline after failing to sell a majority interest in it in 2018.

Tata will pay the government Rs 18,000 crore for Air India, with 15% going to the government and the remainder going to pay off debt. 

The Tata Group, and the SpiceJet chairman Ajay Singh, personally submitted bids for the airline.

Conclusion 

Looking at the poor state of the civil aviation sector in India, the government introduced FDI in civil aviation. Investing in Indian firms that provide scheduled and non-scheduled air transportation services is permitted up to a maximum of 49 percent of their paid-up capital, subject to the fulfilment of specific restrictions.

The criteria include the need for inflows to be made through the government-approved mechanism. The 49 percent cap will cover FDI in civil aviation, FII/FPI investment and other kinds of investment.

To be eligible for a tax deduction, investments must meet all applicable requirements of India’s Securities and Exchange Board of India (Sebi).