Magazine 2014
International Peer-Reviewed Journal
RESEARCH HORIZONS, VOL. 4 JULY 2014
ECONOMICS
FORGING DIRECT INVESTMENT OPPORTUNITIES
AND CHALLENGES IN AVIATION SECTOR
Daksha Dave
ABSTRACT
Indian economy is growing very fast in the world because of converting her huge population into strong
and intelligent manpower. The shortage of capital is gratifying to welcome FDI in various sectors for
development.FDI in aviation sector is also boosting the industry and also providing huge employment
opportunities in aviation as well as allied industries. This paper is focused on FDI, opportunities and
challenges in aviation sector in India. The entire study is based on secondary data. Conclusion of the
study is that FDI is good for aviation industry enlargement because it creates healthy competition which
is benefitting to customers in terms of enhanced service at the cheaper rate and huge employments
opportunities. Government has allowed 49% FDI in aviation industry still we have received a smaller
amount of FDI because there are a number of challenges. Indian Government is making efforts to attract
FDI to make strengthen the sector and there is a lot of potential for development.
Keywords : FDI, IATA, DIPP, ATF, CCEA, PPP,
Introduction
Indian economy is a highest growing economy in the world after China. After introducing LPG
Programmed various sector of the economy developed overwhelming, such as IT sector, Banking and
Finance sector, Entertainment industry, Aviation industry etc. The Indian aviation sector is raising more
than 15% p.a. According to International Air Transport Association, (IATA) report, The growth of its
domestic market in India is among the highest in the world and has the potential to become the third
largest domestic aviation market (with over 450 million mark of domestic passengers) by the year
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020, after that of USA and China. The Passenger output rose from 73 million in FY 2006 to 144 million
in FY 2011, (according to a study by FICCI–KPMG (2012).Government has taken keen interest to
develop the industry during the Eleven Five Year Plan (2007–2012). This period saw the completion of
four international airport projects through the public–private partnership (PPP) mode, and also witnessed
five Indian carriers functioning on international routes.
Literature Review
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Bose Kanti Tarun, (2012), “Advantages and disadvantages of FDI in India and China”. The study
has been done on evaluation of advantages and disadvantages of FDI in China and India based
on literature review. The study was based on two major companies: Wal-Mart operations in China
and Hyundai operations in India. The study concludes that both China and India has been a
hotspot for foreign investment due to its unsaturated market conditions, cheap labour, demographic
factors, consumer behaviour, etc.
2
) Dr. S N Babar and Dr. B V Khandare, (2012), “Structure of FDI in India during globalization
period”. The study is mainly focused on changing structure and direction of India’s FDI during
globalization period. The study is done through analysis of benefits of FDI for economic growth.
The study has been done through sect oral analysis of FDI participation, as well as through study
of country wise flow of foreign inflow in India till 2010.
3)
Chakraborty Chandana and Basu Parantap, (2002), “FDI and growth in India: Co integration
Approach”. The study is explored through a structural Co integration model with vector error
correction mechanism, by a two way link between FDI and long run relationship exists between
FDI and GDP, i.e. unit labour cost and import duty in total tax revenue.
4)
Park Jongsoo, (2004), “Korean Perspective on FDI in India: Hyundai Motors Industrial Cluster”.
The article studies the flow of FDI in India through industrial cluster: with special reference to
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RESEARCH HORIZONS, VOL. 4 JULY 2014
Hyundai Motors. The article concludes that the attitude of Indian government towards foreign
investment has shown a drastic change after 1991. The new reforms of FEMAhave been attracting
the FII’s but the article also concludes that two principal deterrents to investment in India are
bureaucracy and showing pace of reforms. The article suggests that the growth of India has
increased through joint ventures and Greenfield investments.
From the above literature review it has been found that FDI has been valuable for India and its
economic growth. Although the studies are more theoretical rather than analytical, still they have
been of immense help in forming the base for the following work.
Objectives of the Study
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To examine over all progress of the aviation industry.
To examine the role of FDI in aviation industry development.
To evaluate the opportunities and challenges in the industry.
To give a suggestions for future development.
Methodology
The Present study is totally depending on secondary data. However an attempt is made by researcher
to gather information from high quality of documents and sources are like FICCI’S report, Government
departmental report and governments various websites.
Present Scenario of the Aviation Industry
India is rising very fast in specific industries among them aviation is one. Currently Indian aviation
market is the ninth largest civil aviation market in the world. Air transport in India presently supports
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6.6 million jobs and generates over US$ 2.2 trillion of the global gross domestic product (GDP).
Currently, India’s aviation market caters to 117 million domestic and 43 million international passengers.
Over the next decade that market could reach 337 million domestic and 84 million international
passengers. After LPG programme many private Indian companies entered into this sector.
Following chart representing, the contributions of the various companies in total air ways.
Source: Report of the Indian Government – 2013.
Above the figure express that among private companies Indigo and Jet airlines are contributing 54%
in total airlines business. Spices and Air India are second largest contributors in airlines business.
This is a good shine because it creates healthy competition which is benefitting to customers.
According to the CAPA India 2011-12 aviation industry outlook, By the end of this decade, i.e. in
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020, air traffic in India is projected to grow 3.5 times from today’s level, making it the third-largest
market in the world, behind the US and China.
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The Main drivers for the expansion of Indian Civil Aviation Sector are
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) Liberalization and economic reforms undertaken by the government.
) Fast expansion of industries as a consequence of economic reforms.
) High GDP growth in India.
) Increase in inbound and outbound tourists, and in medical tourism; disposable incomes expected
to increase at an average of 8.5% per annum until 2015.
) Emergence of low-cost airlines.
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) The organized retail boom that would require timely delivery of goods, thus contributing to the
growth of the air cargo segment.
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) Corporate increasingly prefer private jets and air charter services.
) Modernization and setting up new airports across the country.
) City-side development of non-metro airports.
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0) Providing international airport status to major Tier-I and Tier-II cities.
1) Open sky policy and permission to private operators to operate on international sectors.
2) Encouraging private investments in airlines and airport infrastructure.
3) Facilitative foreign direct investment norms.
4) Liberal bilateral service agreements and emphasis on development through public-private
partnership (PPP) mode, etc.
Due to high demand of the industry Government declare The Vision “2020” under that the Ministry of
Civil Aviation conceives of building infrastructure to support 280 million customers by the end of year
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020.
Immense growth potential exists in Tier-II and Tier-III markets with airlines on an expansion spree in
these markets. The AAI is upgrading and modernizing 35 non-metro airports in the country at an
estimated cost of around USD 1 billion, as well as modernizing the Chennai and Kolkata airports.
According to the Deloitte Study Report, Industry has a lot of opportunities to develop in future. But
present day aviation industry is passing through an economic crisis, all domestic airline operators,
except Indigo declared financial losses for the year-ended March 2012. According to various estimates,
accumulated losses between April 2007 and March 2012 exceeded INR 425 billion. During the same
period, large Indian players declared major losses. In this scenario, FDI in aviation is expected to
improve consumer sentiment in aviation industry.
Foreign Direct Investment in India
To support and promote growth and prosperity in the Aviation sector of India, the Department of Industrial
Policy and Promotion (DIPP) and the Government of India, are now allowing to 49% FDI in aviation
sector. The foreign direct investment in aviation up to 49% is permissible in India, but foreign airlines
were not permitted to invest in any domestic airline company. FDI in aviation is a conditional.
The Cabinet Committee on Economic Affairs (CCEA) has approved the proposal of the Department of
Industrial Policy and Promotion (DIPP) for permitting foreign airlines to make foreign investment, up to
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9 per cent in scheduled and non-scheduled air transport services.
Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic
investors into the civil aviation sector. Higher foreign investment inflows are necessary at the present
juncture, in order to strengthen the sector. Introduction of global best practices, concomitant with the
induction of FDI from foreign airlines, is expected to lead to higher service standards, international
best practices and induction of state-of-the-art technologies, in the air transport sector.
Until now, foreign airlines were allowed to participate in the equity of companies operating cargo
airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating
scheduled and non-scheduled air transport services. The Government has now permitted foreign airlines
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to invest, under the Government approval route, in the capital of Indian companies operating scheduled
and non-scheduled air transport services, up to the limit of 49 per cent of their paid up capital. The 49
per cent limit will subsume FDI and FII investment. The investments so made, would need to comply
with the relevant regulations of SEBI, such as the Issue of Capital and Disclosure Requirements (ICDR)
Regulations / Substantial Acquisition of Shares and Takeovers (SAST) Regulations, as well as other
applicable rules and regulations. Such investment would further be subject to the conditions that:
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A Scheduled Operator’s Permit can be granted only to a company
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That is registered and has its principal place of business within India,
The Chairman and at least two-thirds of the Directors of which are citizens of India, and
The substantial ownership and effective control of which is vested in Indian nationals.
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All foreign nationals likely to be associated with Indian Scheduled and Non-Scheduled air transport
services, as a result of such investment, shall be cleared from security view point before
deployment, and
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All technical equipment that might be imported into India, as a result of such investment, shall
require clearance from the relevant authority in the Ministry of Civil Aviation.
The total FDI inflows into the air transport sector, during January, 2000 – April, 2012, were US$ 434.75
million, constituting only 0.25 per cent of the total FDI inflows into the country. Government has
opened the door for foreign company but still foreign companies are accepted “Wait and Watch”
policy. For instance, in 2007, India successfully conducted its first launch of a commercial satellite
when an indigenously built rocket put an Italian AGILE astronomical satellite into a 550-km equatorial
orbit. The aim of the satellite was to gather information about the origins of the universe through
imaging of distant celestial objects in the X-ray and Gamma ray regions of the electromagnetic spectrum.
With this launch, India joined an elite club of nations who have the capacity to deploy their space
exploration resources for commercial use.
Moreover, a technology safeguard agreement (TSA) signed in July 2011 paves the way for India to
launch US-made satellites from its spaceport at Sriharikota in Andhra Pradesh. Further, a proposed
commercial space launch agreement (CSLA) with the US government will enable India to compete in
the international market for launching heavy commercial satellites. CSLA is likely to be signed this
year, according to official sources. This agreement will allow US commercial satellites, or satellites
with US components, to be launched on ISRO space vehicles, significantly opening up the nearly USD
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billion global space launch business for India.
Opportunities for FDI in Aviation Industry
The key opportunist that the Indian aviation sector are
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Huge demand.
Rapid Expansion of IT industry.
Strong fundamentals of economy.
Expansion of Tourism and Med tourism industry.
Supportive Government Policies.
Challanges for FDI in Aviation Sector
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Government policy: From a long-term perspective, the GOI needs to roll out more reforms to
resolve the fundamental issues that lead to the poor performance of Indian airlines.
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High fuel (aviation turbine fuel, or ATF) costs: In India, aviation turbine fuel (ATF) constitutes
around 45-50% of the total operating cost of an airline as compared to the global benchmark of
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0-25%. To expect Indian domestic carriers to remain profitable even after paying 50% more on
ATF than their global counterparts is unfair. Even international airlines have to pay nearly 15%
more for refilling in India. Naturally due to high ATF our airlines facing the problem of lose. In this
condition in our aviation industry FDI will not have attraction to invest in India.
The high cost of ATF is attributed to the country’s severe taxation policy. ATF is a decontrolled
petroleum product and the price of ATF is reviewed and fixed by oil marketing companies on a
fortnightly basis at par with the international crude prices movement. But what make ATF dearer
in India are the variable sales tax rates ranging from 4 to 30% across states. Due to variation and
high tax structure leads to uninterested to FDI.
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Sky-scraping Airport Fees: High airport fees are also one of the obstacles in the development of
the industry. In April 2012, Delhi International Airport Limited (DIAL) hiked airport fees by almost
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44% drawing flak from various quarters including international airlines. It has increased the
burden on air travelers. The cascading effect of the move is net decline in passengers.
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) Prerequisite of Proper Infrastructures: Indian aviation sector will remain underutilized unless
accompanying policy and infrastructure reforms are undertaken. It is a prerequisite to develop
proper infrastructure and connectivity of cities and trade centers.
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An inconsistent Tax Structure among States: Every state has its own tax structure and it has
wide variation in tax, making complicated in process which effects in development of the
industry as well as in travelers number.
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) Ominous Condition of international airlines: Due to financial crises situation of international
carriers doesn’t inspire faith. In the last reported financial year, major international airlines posted
losses – Qantas ($253 million), Lufthansa (13 million Euros), Air France-KLM (809 million Euros).
However, airlines like Singapore, Air China, and Emirates saw decline in their profits by 69%,
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3%, 72% respectively to 269 million dollars, 1121 million dollars, 409 million dollars respectively
on yearly basis.
If merely finances of aviation companies were in bad shape, one could have suggested fire-
fighting as an option. But what renders grim look to the whole sector is the restrictive and retarding
environment in which airlines have to operate. Even International Air Transport Association (IATA)
has expressed its reservation stating that unless issues of high taxes and infrastructure costs are
addressed, sector may struggle to take-off despite allowing FDI.
Suggestions
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) Reduction in tax: According to expert, declare ATF as a ‘notified’ product, as a result of which
states will reduce value-added tax (VAT) on ATF. ATF contributes 45–50 percent of an airline’s
total operating costs - this move will likely lower the contribution of ATF and, thus, increase the
profitability of airline operators.
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Training to youth: Facilitate the Indian workforce with technical and maintenance capabilities
such that Indian carriers, maintenance, repair and overhaul (MRO) players, and ground handlers,
among others, have access to a less expensive workforce for cost optimization. A plan to set up
the National Aviation University is an initial step in the right direction, which is helpful to provide
employment and eradicate poverty and unemployment.
3)
Public Private Partnership: To provide a good infrastructure a huge capital is required that is
why PPP is required. The government has been proactive in building and modernizing Indian
airports under the PPP mode to encourage the private sector’s participation. Prominent projects
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undertaken for airports under the PPP mode are at Hyderabad, Delhi, Bangalore, Cochin, Kannur
and Mumbai. These projects have been undertaken through the PPP mode with a total investment
of INR 20,041 crore.
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Profit making approach: India is also gaining a leadership position with regard to launch of
commercial satellites in space. Through this invention India can earn huge profit to utilize for
commercial purpose.
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Fix norms: Government policy should be clear and positive and also attractive which is resulting
in good investment.
Conclusion
The decision of 49% FDI in retail will prove to be beneficial for the Indian middle class and upper
middle class people. Currently, number of Indian passengers using various airlines for travelling is
increasing at a rate of 11% per year, with the advent of FDI; this rate will increase to better ratio.
Furthermore, upcoming investment will increase competition and that will not only improve services
and security, but will also reduce cost of air travelling and hence, more Indians will be able to use
airlines. However, the State still owns the Air India Limited and unless the State disinvests the Air India
Limited completely, we cannot expect much progress in aviation industry because, by holding Air
India, Indian government immorally controls the market and this intervention creates losses for private
aviation companies and the Air India too. Due to inflation and then general price rise, the private
companies fail to get any bailout to compensate their losses. Governmental intervention will keep the
possible growth of aviation industry and benefits of Indian consumers at a condensed rate.
Tony Tyler, IATA’s Director General and the CEO in his keynote address at the India Aviation 2012
conference displayed immense confidence in the Indian Aviation Industry saying, ‘I am passionate
about aviation. And I am an India optimist. The IATA (International Air Transport Association) will be
fully engaged in the team effort to turn Indian aviation into the great success story that it has the
potential to become. India should not settle for a bronze medal in the world of aviation. It has pure gold
potential,’
References
Bose Kanti Tarun, (2012), “Advantages And Disadvantages Of FDI In India And China”.
Dr. S N Babar and Dr. B V Khandare, (2012), “Structure of FDI In India During Globalization Period”.
Chakraborty Chandana and Basu Parantap, (2002), “FDI And Growth In India:
Park Jongsoo, (2004), “Korean Perspective On FDI In India: Hyundai Motors Industrial Cluster”
Web sites
http://dgca.nic.in
http://www.aai.aero/
http://www.centreforaviation.com/
www.dipp.nic.in
www.rbi.org.in
http://www.fipbindia.com/
Dr. Daksha Dave : Associate Professor, Dept. of Economics, Smt. MMP Shah Women’s College of
Arts & Commerce, Mumbai
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