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Tuesday, 25 October 2011 00:00
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Good idea to link AI stake to FDI in aviation


The current aviation FDI policy, the industry ministry has done well to recognise, is one big joke. On paper, 49% FDI is allowed, but only from non-airline firms. That means a chemist in Singapore can invest in Kingfisher Airlines, but Singapore Airlines cannot. In no other sector is this kind of hypocrisy practised. In the automobile sector, all the big investments made by foreigners have been made by automobile firms, and that investment, in turn, has propelled the Indian firm to greater heights—look at how Maruti engineers are such an integral part of the Suzuki global story. Since the aviation business is very capital intensive—private airlines have run up R3,500 crore of losses in the first half of this year—it is obvious that only an airline company with a long-term view of investments, and the ability to turn around the airline, will invest big money into the sector. Sadly, in opposing the industry ministry’s proposal to allow foreign airlines to have a 26% stake—this allows the foreigner to block any special resolution by the airline’s board—the aviation ministry continues to toe the line of the bigger Indian airline firms who don’t want any of the global biggies to operate in India. Hopefully, the Cabinet, which is to examine the industry ministry’s proposal, will take a larger view of things.

What the Cabinet would also do well to consider is to link the new policy with Air India’s fate. There is obviously no guarantee that, should foreign airlines be allowed to buy a 26% stake in Indian airline firms, this will automatically be invested in Air India. But, apart from helping meet its huge needs for cash, a well-known airline investor will also help give Air India the strategic and operational guidance it so desperately needs. And now that the government is all set to okay Air India’s proposals to spin off its engineering and ground handling divisions into separate subsidiaries, Air India’s manpower-to-airplane ratio will no longer look as bad as it did in the past. There is, of course, the whole issue of credibility since a foreign airline will buy a 26% stake in Air India only if it is convinced the government plans to exit eventually, and while it holds the majority stake, it will take the strategic investor's views on board on all major decisions—the continuing face off between the government with 26% equity owner T Rowe Price at UTI, though, is a sign that suggests this assurance may not mean that much.



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