FDI in Civil Aviation – how it will help - Archie D’Souza

The Central Government recently approved a proposal for airlines to borrow $1 billion overseas, but delays FDI.  Here are two reports on this subject which appeared in the press on week 16 (APR 15-21, 2012)
20 APR, 2012, 06.06PM IST, REUTERS
Decision on FDI in aviation not before May-end: Minister
NEW DELHI: The cabinet is unlikely to consider a proposal to allow foreign airlines to invest in domestic carriers before the end of May, a cabinet minister, who asked not to be named, told reporters.
The ruling Congress party's biggest ally - Trinamool Congress - is opposing the proposal, the minister said, adding that the decision depended on the ally's consent.
Indian airlines, facing a debt-load of $20 billion and losses of $2.5 billion, have been hurt by high fuel costs and massive competition, and are looking for ways to bring in cash to run daily operations.
Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.
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Govt lays down ECB norms for civil aviation
THE HINDU BUSINESSLINE BUREAU
Industry cap at $1 b; individual airline limit pegged at $ 300 m
NEW DELHI, APRIL 19:
The Government has allowed companies in the civil aviation sector to raise external commercial borrowings (ECBs) for a year to meet their working capital needs and also refinance outstanding working capital rupee loans.
This would come as a lifeline to cash strapped domestic airlines which had to face the brunt of increased interest rates as well as rising jet fuel prices, besides the slowdown in the economy. The proposal to allow airline companies to access ECBs was part of Finance Minister, Mr Pranab Mukherjee's Budget 2012-13 speech.
Prior to this decision, domestic airline companies were not allowed to access the ECB window. Domestic airlines can now tide over their present financial crunch as they can access low-cost funds through the ECB window.
The aviation sector can avail itself of external commercial borrowing to the tune of $1 billion with individual airline companies allowed to borrow up to $300 million in 2012-13, a Finance Ministry statement said today.
The limit can be availed in a lump-sum or in tranches depending on the utilisation during one year, it added.
The RBI, which will notify the details of the scheme in a week's time, will consider proposals of individual companies under the approval route based on parameters such as cash flows and the capacity to repay their loans from the forex earnings.
The central bank would also consider relaxing the average maturity period for ECBs above $20 million from five years to three years.
krsrivats@thehindu.co.in

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So, as per the press-releases of the government of India aviation companies will be allowed to borrow up to $1 billion (Rs. 5,100 crore) collectively and up to $300 million individually, from overseas, via the external commercial borrowings (ECB) route.  Last month, in his Budget speech the Finance Minister had announced that companies in the aviation sector would be allowed to avail of ECBs for a period of one year for working capital/re-financing of outstanding working capital rupee loans.  Here is an extract from that speech:

“The ECB made under this provision would have a maximum ceiling of USD 1 billion for the entire Civil Aviation sector. The limit for individual airline companies would be US$ 300 million. This limit can be availed either in a lump sum or in tranches depending upon the utilization of the limit during the 1 year when the facility is available.

“The rapid growth of the Aviation sector in India has generated demand for additional finance for working capital and capacity expansion. High operating costs, particularly on account of high fuel costs, have put additional stress on the Airline Industry.”

A major problem that coalition governments face is trying to carry every party on economic issues.  One party that has been a spoiler in the economic policies of UPA-2 is the Trinamul Congress (TMC).  They have not tolerated any departure from their populist agenda as we have seen in the way their own party member and former Railway Minister Mr. Dinesh Trivedi was treated.  So, in spite of the fact that we have a very able person leading our nation (no one could do better under the current circumstances) the UPA has been unable to take even small steps towards economic reforms.  And, the word FDI seems to be evil in the eyes of certain UPA members, notable among those the TMC.

The press reports are a clear indication that the proposal to permit up to 49% foreign direct investment (FDI) by foreign airlines in Indian carriers is going to be a non-starter.  The proposal was supposed to be approved by the Cabinet in week 16 of 2012.  However, from the press-releases and other reports it is clear that one more policy of the government will be put on the back-burner.  Although the report says May-end it looks like these have been put on hold indefinitely.  The PM himself, no less, has referred the issue back to a Group of Ministers (GOM) with a directive to "establish consensus".  Is it possible?  Only time will tell.

There is a perception in certain quarters that the shelving of FDI is essentially due to the friendships of former civil aviation minister, Mr Praful Patel, with the heads of Jet Airways and IndiGo.  Another perception is that both these companies are opposed to FDI, as, again another perception, their competitors Kingfisher, GoAir, and SpiceJet will benefit from it.  No doubt FDI will dilute the promoters’ stakes in the respective airlines but what about the benefits it would bring?

It does make political sense, at the moment, to pander to the allies even though it could lead to economic disaster.  The PM has definitely learnt its lesson in the last parliamentary session when it had to retract an approval to permit FDI in retailing.  My purpose in writing this is not to go into the pros and cons of political issues or strategies, though I dread to think what would happen to the economy if the NDA comes back to power.  We saw where they took the country during their five year tenure.  It is economics not politics that I’m referring to.

What does the proposed current policy do?  In my opinion, it’s like applying skin ointment on a patient with over 80% burns.  While this policy decision will provide the Airline Industry an additional source of capital at a low cost and thus help them tide over their present financial crunch, it will not solve the problems faced by the individual companies or the industry as a whole.  This is definitely one of the most unenthusiastic responses from the government – a half-baked measure that, in all likelihood, considering the volatility of the Indian Rupee, will make the situation worse.  I hope that the government’s indecision or the realities of coalition politics, whichever way one puts it, does not lead to the sector going into ICU.

 The relevant circular/notification giving effect to the aforesaid Budget announcement is expected to be issued within 7 days.

[To be concluded – in part II, I shall go into the benefits of FDI in Civil Aviation]