With the latest round of reforms in the foreign direct investment (FDI) policy, the Centre has boasted that most sectors would now be eligible for automatic approvals, making India the most open economy in the world for FDI. At least in the civil aviation sector, for which the Centre also unveiled a new policy last week targeting greater connectivity at cheaper fares, that opinion seems a little ahead of time. Raising the FDI limit for airlines (including regional operators for whom FDI of 49 per cent was only allowed last November) to 100 per cent, with automatic approvals for foreign ownership up to 49 per cent, sounds good on the face of it. But it is more likely to bring relief for domestic carriers looking to raise capital or forge an alliance with a global airline than attract many new players into the fray. This is because global airline players continue to be hemmed in by the 49 per cent ownership limit set by the United Progressive Alliance government in 2012, following which ventures such as AirAsia India and Vistara took off. In theory, a foreign airline could tie up with other institutional investors like private equity funds to form a 49:51 joint venture and tap India’s double-digit air traffic growth. Even if a strategic airline investor agrees to be a junior partner, securing a scheduled operator permit still requires an airline’s chairman and at least two-thirds of its directors to be Indian citizens, and substantial ownership and effective control to be vested in Indian nationals. There need to be swift changes in the small print, if the skies are to be as open as hoped for in the aviation policy.
The Centre has admitted this balancing act is part of a dynamic, calibrated process to make domestic carriers more competitive for now. This process is also driven by security concerns. While the U.S. originally barred foreign control of airlines in 1926 so that its military could take charge of civilian aircraft in times of strife, most countries adopted a similar stance following World War II, citing security concerns and the need to protect the turf of national airlines. The U.S. now allows around 25 per cent foreign ownership in airlines, South Korea permits 49 per cent and Chile a full 100 per cent, even as it has done away with national control and ownership norms. Australia has now scrapped limits on airline ownership for aircraft flying within its airspace — a model that could very well serve India’s aviation policy objectives of tripling passenger traffic by 2022 and developing regional connectivity. To stay at the forefront of FDI reforms in a slowing global economy, India could have proposed a bolder reform in airline ownership norms and dovetailed that with its vision of an open sky policy within the SAARC region and beyond. That would have been a global game changer.