The Manmohan Singh government is set to follow up Thursday's politically tough decision on fuel with another reform-oriented policy move-it proposes to allow foreign airlines to invest in the aviation sector to bring in more foreign direct investment, or FDI. This time the government also hopes to get past its main hurdle, ally Trinamool Congress.
The meeting of the Cabinet Committee on Economic Affairs, which is currently underway, is also likely to take up FDI in power exchanges of up to 49 per per cent and disinvestment in five public sector undertakings. According to sources, FDI in multi-brand retail is not on the agenda, but can be included at the last minute.
Markets have surged today in anticipation of an announcement this evening, when the Prime Minister-who has had to face some stinging criticism both at home and abroad for failing to push reforms that are crucial to revive a depressed economy-meets his ministers to discuss the proposal.
The Cabinet Committee on Economic affairs will also discuss proposals for disinvestment in major public sector units.
Current FDI norms allow foreign entities other than airlines to directly or indirectly own an equity stake of up to 49 per cent in Indian airlines. The new proposal, says a Cabinet note accessed by NDTV, is that foreign airlines will be allowed to invest in Indian peers, but can only hold up to a 49 per cent stake.
Although a 49 per cent stake gives the investors minority shareholder control, they will get the right to block a special resolution.
Reacting to the proposed move, Rajiv Pratap Rudy, former civil aviation minister, said that "the policy drafted by the government was done not for the country, but for individuals. This is being done to help one particular airline".
The government, in its FDI in aviation proposal, has attempted to cover most areas of concern voiced by political parties. According to the Cabinet note, it is proposed that the chairman and two-thirds of the board of any domestic airline receiving FDI will need to be Indians, and substantial ownership and control will remain with Indian nationals.
Security implications and the need to ensure that no dubious investor takes advantage of this has been a constant concern and the new proposal incorporates suggestions not just by the Aviation Ministry but also the Home Ministry. It proposes that all foreign nationals participating in the venture will need security clearance. Equipment imports will have to be vetted by the aviation ministry.
If implemented, the new norms are expected to help provide much-needed cash flow to India's bleeding private airlines. It is also expected to result in technology upgradation both in ground handling and flight operations as it will get into the industry some best international management practices and equipment.
The FDI will apply to scheduled private operators-those that run regular operations-like Jet Airways, Indigo, SpiceJet, Kingfisher, JetLite and Go Air. There are also some regional scheduled private players.
Opening the sector to foreign airlines is likely to mean good things for passengers. More competition is likely to result in more competitive fares and better services. Better international connectivity will also be a likely fallout.
Airlines like Vijay Mallya's cash-strapped Kingfisher have been pushing for FDI to boost the sector, but the airline industry is divided on this. More successful players like Indigo and Jet have expressed reservations in the past that allowing global players in will lead to cartelization and takeovers of Indian carriers.
Then there are the political hurdles. The government has to get ally Trinamool Congress' okay on it. The Trinamool, which opposes FDI per se, has said its one Cabinet minister Mukul Roy will not attend today's meeting-the excuse this time is President Pranab Mukherjee's first visit to Kolkata. Mr Roy was also absent at a yesterday's meeting of the Cabinet Committee on Political Affairs, which decided on the diesel price hike.
Staying away from meetings is a classic indication of a Trinamool sulk, but the party usually follows it up with a letter seeking a deferment on the issue it is opposing. This time it has sent no such letter on FDI in aviation yet, and the government has its fingers crossed that it will not. It has also done its homework better this time and circulated its proposal among ministers yesterday.
The Cabinet note explains the rationale behind the move to allow foreign airlines to invest. The Indian aviation industry, it says, is steering through acute turbulence as most private airlines are in dire need of funds for operation. A denial of access to foreign capital could result in collapse of these airlines, and any airline's closure could create a systemic risk for financial institutions, which have a large exposure to these companies.
FDI inflow in the aviation industry, the note says, stands at a mere $433.75 million (Rs. 2,405.36 crore). FDI inflow into the aviation industry is a meager 0.25 per cent of the total FDI inflow.
A capital raise by these airlines is not easy as private equity funds are not keen to invest in the sector. The Manmohan Singh government and the Prime Minister personally have for some time now been facing severe criticism for allowing the economy to slide by not taking politically tough reform decisions.
Long feted for his pivotal role in liberalising the Indian economy, Dr Singh has recently received several less than flattering report cards from international publications like Time
magazine and the Washington Post
India has been downgraded by major overseas rating agencies and investment banks which have reiterated their concern about the "policy paralysis" afflicting the Indian government.
Back home a panicked Industry has been sending out SOS' that the government must now place economic revival over coalition dynamics.
Ms Banerjee is the Congress' most difficult ally; she has resisted most reform measures, arm-twisting the UPA government with the threat of exiting with her 19 crucial MPs in the Lok Sabha. Ms Banerjee is seen as having single-handedly given the UPA government its image of suffering a "policy paralysis".
Analysts and overseas rating agencies have reiterated their concern about the policy paralysis afflicting the Indian government.
She has opposed FDI in various sectors like retail and aviation. She has forced the government to roll back fuel price hikes despite the deregulation of petrol and has demanded a withdrawal of the diesel price hike announced yesterday. She has also stalled privatization of the pension sector. (with inputs from agencies)