Wednesday 19 September 2012

Foreign Direct Investment in Aviation Sector of India

The Indian Prime Minister Manmohan Singh is being ridiculed as ‘underperformer,’ ‘puppet prime minister’ and various other names since a long period. However, Manmohan Singh chose to roar back this time and the government announced 51% FDI in Retails and 49% FDI in aviation. This decision came just after the previous announcement of an increment of Rupees Five in the price of Diesel and a reduction of subsidies for LPG. The opposition parties and the media presented the whole issue in a dramatic manner and many of the allies of current coalition government also expressed their rejection for these politico-economic moves. In previous post, I presented the reasons why the reduction in subsidies isn’t anything beneficial for the tax-payers of India and it will increase economic burden on poor, middle class, and upper-middle class families. Here, I will discuss about the issues of Foreign Direct Investment in aviation industry.

Foreign Direct Investment in Aviation Sector

The opposition parties aren’t talking much about the approval for FDI in aviation sector and this is because of the fact that common men of India do not use air flights for their travelling purposes. The total number of passengers who travelled through air in 2011 was around 100 million1 . This is less than one-tenth of total Indian population. Obviously, aviation industry is yet not a factor for vote banks in India and hence, the political parties didn’t find anything profitable to oppose FDI in aviation industries. On the other hand, FDI in aviation sector will certainly prove to be helpful for Indian government as the upcoming foreign investment will release a fraction of economic burden on Indian government as the Air India Limited, the government owned aviation industry is continuously suffering huge losses and recently, the government granted a lump sum bailout package for Air India along with Rs300 billion ($5.8 billion) of subsidies. Obviously, this bailout resulted in further increase in inflation that increased rate of price rise and common people suffered the loss of their purchasing power.
It should be noted that the private aviation companies fail to enjoy such subsidies, however, government often indicates that it may offer bailout packages for private companies such as Jet Air Ways, Kingfisher Air Lines, and others. In 2008, the management of Jet Airways rolled back from its decision to lay off 1900 employs because of governmental interventions and there were doubts that the government offered some bailout package for Jet Airways.

Who will be benefited by FDI in Aviation?

Foreign direct investment in aviation sector will prove to be highly beneficial for not only the government but for the oligarchic corporate and businessmen too that are suffering huge losses since a few years. Obviously, government wasn’t planning for helping common Indian people through this decision of 49% FDI in aviation sector because if liberalization was the actual motive of the government, then it could have provided 100% FDI permissions in aviation industry as that would have been the actual liberalization. However, the only motive of government is to help the Indian corporate and rich businessmen for whom, it may fail to provide any bailout by printing new money because of the opposition of people and other political parties. With limited FDI, Indian aviation companies will have major control over the market. Opposition parties aren’t opposing FDI in aviation sector because it doesn’t offer them a chance to lure and strengthen their voter’s bank.

Benefits for Common Indians

Irrespective of the intentions of the government and opposition parties, 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. While the loss of Air India Ltd. is the loss of tax-payers and it attains bailouts and subsidies that results in 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 reduced rate.

Is it an Honest Decision or a fraud in form of Economic Bubble

While FDI in retail sector is a good thing, it is still a fraud because government will control the aviation industry through Air India Ltd. and that will cause losses for tax-payers. Furthermore, there is nothing for middle class tax payers because while the upcoming FDI will reduce the current burden of fiscal deficit and national debt on Indian government, the government will again announce some socialistic program like Education for All2 , NREGA, MNREGA, Universal Health Care, Food Security Bill, and so on, and this will again bring the government under huge economic burden of fiscal deficit and national debt. Obviously, this decision of FDI is nothing but a creation of a new economic Bubble in aviation sector of India that will provide chances for the stock market players to make big money for some time and that will create furthermore malinvestment as the private players will invest in aviation, the government will waste tax-payers money in ridiculous and insane socialistic programs like Health Regulators3 at every private and governmental hospitals of India. At the end, this bubble will again burst within a few years and the poor and middle class Indians will face the consequences in form of economic downturn. This game of economic bubble-burst will continue until the complete economic collapse as is being faced by the Euro Zone nations and the United States.

It should be noted that such economic bubbles cannot cause actual economic progress. However, the government can change all this into an honest decision of liberalization by completely disinvesting Air India LTD. and by allowing 100% FDI, or completely free market in aviation sector. In addition, the State should maintain the law that government will not interfere with private sector as it did in 2008 with Jet Airways.


FDI in Aviation sector is a good sign with not so-good intentions and it will create further economic bubble and will provide chances for government to create more socialistic programs which will further increase more fiscal deficit and national debt. I will discuss about FDI in Retail Sector in next post. Also, more than aviation industry, Indian Railways Industry is more in need of disinvestment and FDI. However, government has opted for the easier option while Indian Railways is still proving to be a great burden on tax-payers.

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