The New FDI reforms to be a game changer for India’s civil aviation sector

For brownfield projects, first 74 percent of foreign investment would be through the automatic route, but beyond 74 percent shall require government approval. The new norms have done away with the condition of access to ‘state-of-art’ technology in the country for FDI more than 49 percent. Foreign airlines are still barred from holding equity stake in Indian carriers above 49 per cent.Undoubtedly, the reforms to FDI would be a game changer for civil aviation. Under the new reforms; the government has allowed 100 percent FDI through automatic route for greenfield projects.
The move comes immediately after RBI governor Raghuram Rajan announced that he was stepping down. Rajan’s decision, whose reforms have been credited for much of the economy’s success in recent years, came as a jolt to the country’s financial markets.In a bid to boost job creation and the local industry; the Indian government announced sweeping reforms to rules on foreign direct investment (FDI), opening up its defence and civil aviation sectors to complete outside ownership.

The fact that India needs FDI is pertinently obvious. Since it would benefit nearly all of the country’s sectors including civil aviation. While 100 percent FDI in airlines is a measure that is followed by few countries around the world; India is uniquely positioned as far as the aviation sector goes and remarkably depicts the largest growth potential with up to 20 percent CAGR projected for the next 3-5 years. Thus a 100 percent FDI in the civil aviation in the Indian context makes sense, being that as a market, India is in need of additional funding and especially airlines that are well funded with international linkages.

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The slew of FDI reforms come immediately after a new civil aviation policy was announced recently. Some of the key facets of the changes in the civil aviation policy are:

Airlines will soon charge only Rs 2,500 for one hour flights and will get tax incentives for operating on unserved routes even as fliers will have to pay additional levy towards regional connectivity fund under the civil aviation policy unveiled.
The government has scrapped the controversial 5/20 norm (5 years of domestic experience and a minimum of 20 aircraft) and now any domestic airline can fly overseas provided they deploy 20 planes or 20 percent of their total capacity for domestic operations.
Currently around 75 out of 450 airstrips/airports have scheduled operations. Revival of the remaining airstrips and airports will be “demand driven”, depending on firm demand from airline operators, as no-frills airports will be done at an indicative cost of Rs 50 crore to Rs 100 crore, without insisting on its financial viability.
The state government will provide land free of cost and free from all encumbrances and also provide multi-modal hinterland connectivity (road, rail, metro, waterways, etc) as required.
Inputs from and willingness of the state governments will be taken before revival of any airport is undertaken. Airports Authority of India /state governments can explore possibilities of developing these airports through Public Private Partnership mode also.

State government will provide police and fire services free of cost. Power, water and other utilities will be provided at substantially concessional rates. Self ground handling by airlines will be allowed for operations under Regional Connectivity Scheme (RCS) at all airports.

There were also a slew of measures announced to boost safety and security in the supply chain. The new aviation policy and FDI reforms are part of the government’s endeavour to foster the development of the aviation sector significantly. These policies are expected to provide a significant boost to the countries aviation sector and enable it to be among the top three nations in the world with regard to domestic and international passenger traffic.

It is a move that has a few downsides. Consequently, this would also mean that Air India’s virtual monopoly on overseas routes fades as foreign players with commensurate financial resources set up base in the country. While Air India may need to buckle up, private airlines have little reason to worry.

After the last liberalisation of FDI in November 2015, this is the next set of FDI reforms that is expected to create an amenable environment for foreign investment in the country. The decision was taken at a high-level meeting chaired by Prime Minister Narendra Modi.

There would be more competition and an overall consolidation of the country’s civil aviation sector.

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