By backing the recently announced civil aviation policy with a liberal funding mechanism, India’s domestic aviation market is expected to quadruple in size in next five years. This would make India the third largest aviation market in terms of (domestic) passenger traffic. The government expects the quantum of domestic ticketing to reach 30 crore by 2022, a big jump from the current size of about 8 crore tickets sold annually.
The government is confident of achieving such a sizeable growth by making flying quite affordable for the masses. “Allowing 100% FDI in domestic airlines is a bold move, which goes further than most countries in the world,” says Binit Somaia, Sydney based aviation expert at Centre for Aviation (CAPA). The new policies, he adds, would provide the needed tailwind to one of the fastest growing major aviation markets in the world. To promote pan-India connectivity, the government has offered fiscal incentives to develop airports in smaller towns.
The growth in aviation will create a large multiplier effect in terms of investments, tourism and employment generation, especially for unskilled and semi-skilled workers.
“The days of micro-management in aviation are gradually getting done with,” says Amber Dubey, partner and India head of aerospace and defense at global consultancy, KPMG. The government is now limiting itself to issues like consumer interests, aviation safety and security and leaving the rest to market forces.
By permitting 100% foreign-owned airline in India, the avoidable controversy on “ownership and control” is now over. Foreign airlines can now focus on customers and competition rather than wasting time on legal and regulatory issues, adds Dubey. The liberal regime would bring in deep-pocketed global players with more capital, aircraft fleets and best practices thus, bringing in more competition which will bring down prices and enhance air penetration in India.
Somaia, however, feels that there is still no clarity on whether foreign airlines, with more than 49% foreign ownership, are eligible to operate on international routes under India’s bilateral air services agreement. In the absence of this permission, foreign players might shy away from investing in domestic-only airlines. Dubey of KPMG is confident that foreign-owned airlines will be free to use the bilateral quota from the Indian side.
To speed-up the modernisation and expansion of existing airports, the government has also allowed 100% FDI in brownfield airport projects. Such a move was critically required as India will need USD 30-40 billion of capital to modernise its airport infrastructure over the next 10-15 years. However, since most of the brownfield airports are owned by the Airport Authority of India (AAI), aviation mavens call for its corporate restructuring so that those airports that could attract foreign investment are established as separate legal entities. “Such restructuring of the AAI will neither be quick nor easy but it is a necessary pre-condition without which there will be limited investor interest,” cautions Somaia.
The liberalised FDI restrictions might, however, result in increased foreign interest in GMR and GVK’s assets at metro gateways, both of whom are seeking investors.