Skies Half Open: Foreign Investment in India's Airline Industry

Abstract

The foreign investment regime governing the airline industry has been the subject matter of considerable debate. Our goal in this paper is to supplement the literature by embarking on an analysis of the foreign investment regime in India and to cautiously suggest that India’s new regulatory reforms could be a harbinger for other states. A study of the foreign investment regime in the airline industry in India is both interesting and timely, for at least two reasons. First, India has nearly everything that bodes well for the growth of an aviation market, and it is one of the fastest growing aviation markets in the world. Second, the Indian Government has introduced substantial reforms to liberalize the aviation sector.

Although India has transitioned from a highly restrictive regime to one that is among the most liberal in the world, and that too within a relatively short span of time, we argue in this paper that the liberalized norms give rise to tension on several counts that is not easy to resolve. For instance, the policy creates a dichotomy between foreign airline investors (who face a restrictive regime) and non-airline investors (who enjoy a liberal regime). Moreover, the restrictions on “substantial ownership and effective control” that apply to the airline investors give rise to several issues in implementation. This is complicated further by the influence of several interest groups that seek to influence government policy in this area. These are generally incumbent airline companies and their controllers who seek to raise the bar for new entrants.

Even if Indian domestic law on foreign investments can be addressed, the ownership and control requirements under various bilateral agreements between India and other countries (which cater for the operation of flights between those countries) tend to pose a stumbling block towards full liberalization. Unlike domestic laws which can be reformed unilaterally, India’s ability to unlock the investment restrictions under the bilateral agreements is much more circumscribed given that such negotiations occur within the realm of reciprocity.

Despite various shortcomings in India’s foreign investment policy in the airline sector, the industry has witnessed massive growth. It remains to be seen whether resolving the regulatory problems will unleash its further potential. It will also be illuminating to see how and to what extent India’s new way will influence other states as to their policy.

Keywords: Foreign investment, aviation industry, airline, substantial ownership, control, India