Correct flight path

The proposed policy to allow foreign airlines to buy into Indian carriers will restore sanity to an irrational policy put into place some years ago, whereby companies already in the business of flying would not be allowed to enter India’s aviation sector (they were welcome to try their hand at bricklaying, though). If this absurd rule were applied to other sectors of activity, it would mean that Wal-Mart would not be allowed into retailing, and Holcim would be told it can do any business other than making cement. Naturally, therefore, there has been no foreign investment in India’s aviation sector—which was probably the desired end result. If so, it has certainly worked. For, it is this illogical clause that prevented Singapore Airlines from coming in as a partner for the still-born Tata airline, and also prevented the privatisation of Indian Airlines. In other words, the policy as it stands today has already done harm to Indian aviation.

That said, it is an open question as to whether the policy changes now proposed will fly, given how strong the local players in the industry are and how formidable their lobbying power must be. Some years ago, it may be recalled, a minister in the NDA government publicly rebuked a chamber of commerce whose aviation sub-committee recommended that foreign airlines be prevented from buying into local carriers here; as the minister pointed out, the head of the chamber’s aviation sub-committee was a leading local air carrier and so had an obvious conflict of interest, which had not been disclosed. Indeed, the bar on foreigners has been taken to the bizarre extent of not allowing Persons of Indian Origin (PIOs) to set up airlines in the country.

The proposal to raise the minimum equity requirement for new airlines from Rs 30 crore to Rs 50 crore (the minimum number of aircraft remains at five) will be criticised by many as hindering competition, but it is better than the proposal floated some months ago to raise the floor to Rs 250 crore, a level of equity investment that even the public sector Indian Airlines does not have. Though the foreign investment limit was raised from 40 per cent to 49 per cent last year, the proposal to hike this further is a sensible one since the aviation business is capital-intensive. In other sectors where substantial capital investment has been required for growth (like telecom and insurance), foreign funds have been injected through a variety of holding firms or through other subterfuges; it is better to have a transparent set of rules, as has been done in telecom, where 74 per cent foreign ownership is now possible.

The rules for foreign investment as they have evolved in sectors that are seen as sensitive, like the media and telecommunications (among others), specify some standard safeguards for retaining operational control in the hands of resident Indian citizens (majority on the board, reservation of key positions, and so on). These do little harm, and if they help get past nervousness about allowing foreign entry into sensitive sectors, they can be lived with. However, the idea of capping the voting rights of foreign airlines is ill-advised. If the government wants to move in that direction, it should consider amending company law to allow different classes of shares, as exist in many other market systems.