UNIVERSITY OF PETROLEUM AND ENERGY STUDIES

DEHRADUN

DISSERTATION

FDI IN AIRLINE INDUSTRY

Under Supervision of:

Dr. B.K. Chaturvedi

Submitted by:

Siddharth Ranawat

500028167

Bachelor of Business Administration [Aviation Operations]

2013-16
 DECLARATION

This is to certify that I have completed the Dissertation titled “FDI IN AIRLINE
INDUSTRY” under the guidance of Dr. B.K. Chaturvedi in partial fulfillment of the
requirement for the award of Degree of Bachelor of Business Administration from
University of Petroleum and Energy Studies, Dehradun.

This is an original piece of work & I have not submitted it elsewhere.

Name: Siddharth Ranawat

Enrollment No.: R460213040

SAP ID: 500028167

 CERTIFICATE

This is to certify that the Dissertation titled “FDI IN AIRLINE INDUSTRY” is an

academic work done by Siddharth Ranawat submitted in the partial fulfillment of
the requirement for the award of the degree of Bachelor of Business
Administration from University of Petroleum and Energy Studies, Dehradun,
under my guidance & direction.

To the best of my knowledge and belief the data &information presented by him
in the project has not been submitted earlier.

Signature:

Name of the Faculty:

Designation:
 ACKNOWLEDGEMENT

The successful completion of the Dissertation would be incomplete without the

mention of the people who made it possible.

I would like to take the opportunity to thank and express my deep sense of
gratitude to my faculty Dr. B.K. Chaturvedi.

Dr. B.K. Chaturvedi, without whose guidance, knowledge and expertise this
project would not have been accomplished and I would like to thank him for his
sustained interest and advice that has contributed to a great extent in the
completion of the project.

I would like to express my special thanks to Mr. Manish Yadav, who gave me the
golden opportunity to do this Dissertation on the topic “FDI IN AIRLINE
INDUSTRY”.
 Abstract

Airline is a driver of economic and social development of a country. The turnover of the Indian
Airline sector today exceeds Rs. 1 lac crores. Private sector has played an unprecedented role
for developing the airport sector in the country. Some of the Indian companies are global
brands in the airport space. The investment expected in the 12th Five Year Plan is Rs.70, 000
crores and out of this Rs.55, 000 is expected from private sector. Keeping rapid growth of the
sector in mind, adequate qualified manpower becomes a crucial issue. There is an urgent need
to set up a world class National Airline University in India.
 The Indian Airline Industry

Introduction

Air India was set up by J.R.D. Tata, who ran it successfully until it was nationalized in
1953. In the 1960s, The Maharaja as the national flag-carrier was affectionately known,
was flying to 32 destinations (it now flies to 46 destinations) and making profits. For
many years in India air travel was perceived to be an elitist activity. This view arose from
The Maharajah syndrome where, due to the prohibitive cost of air travel, the only
people who could afford it were the rich and powerful. In recent years, however, this
image of Civil Airline has undergone a change and Airline is now viewed in a different
light - as an essential link not only for international travel and trade but also for providing
connectivity to different parts of the country. Airline is, by its very nature, a critical part
of the infrastructure of the country and has important ramifications for the development
of tourism and trade, the opening up of inaccessible areas of the country and for
providing stimulus to business activity and economic growth. Until less than a decade
ago, all aspects of Airline were firmly controlled by the Government.

In the early fifties, all airlines operating in the country were merged into either Indian Airlines or
Air India and, by virtue of the Air Corporations Act, 1953 this monopoly was perpetuated for the
next forty years. The Directorate General of Civil Airline controlled every aspect of flying including
granting flying licenses, pilots, certifying aircrafts for flight and issuing all rules and procedures
governing Indian airports and airspace. Finally, the Airports Authority of India was entrusted
with the responsibility of managing all national and international airports and administering
every aspect of air transport operation through the Air traffic Control.

With the opening up of the Indian economy in the early Nineties, Airline saw some
important changes. Most importantly, the Air Corporation Act was repealed to end the
monopoly of the public sector and private airlines were reintroduced. Domestic
liberalization took off in 1986, with the launch of scheduled services by new start-up carriers
from 1992. A number of foreign investors took an interest. Modiluft closed after
failing to meet financial obligations to lassoers and its technical partner, Lufthansa. In
1996-1998, Tata and SIA tried to launch a domestic carrier, but the civil Airline minister
had publicly stated his opposition on numerous occasions (Airline Business 1998).

The Indian government introduced the open sky policy for domestic players in 1991 and partial
open sky policy for international players only in November 2004. Increasing liberalization
and deregulation has led to an increase in the number of players. The industry comprises
three types of players full cost carriers, low cost carriers (LCC) and many start-up airlines.
 Present Indian Scenario

It is a phase of rapid growth in the industry due to huge build-up of capacity in the LCC space,
with capacity growing at approximately 45% annually. This has induced a phase of intense price
competition with the incumbent full service carriers (Jet, Indian, and Air Sahara) disk-counting
up to 60-70% for certain routes to match the new entrant’s ticket prices. This, coupled with
costs pressures (a key cost element, ATF price, went up approximately 35% in recent
months, while staff costs are also rising on the back of shortage of trained personnel), is
exerting bottom-line pressure.

The growth in supply is overshadowed by the extremely strong demand growth, led
primarily by the conversion of train/bus passengers to air travel, as well as by the fact that
low fares have allowed passengers to fly more frequently. There has, therefore, been an
increase in both the width and depth of consumption. However, the regulatory
environment, infrastructure and tax policy have not kept pace with the industry‘s growth.

Enactment of the open sky policy between India and SAARC countries, increase in
bilateral entitlements with the EU and the US, and aggressive promotion of India as an
attractive tourism spot helped India attract 3.2 million tourists in 2004-05. This market is
growing at 15% per annum and India is expected to attract 6 million tourists by 2010.
Also, increasing per capita income has led to an increase in disposable incomes, leading
To greater spend on leisure and holidays and business travel has risen sharply with
increasing MNC presence. Smaller cities are also well connected now. Passenger traffic has
increased and over 21 million seats have been sold, resulting in a growth of over 50%. The
Indian travel market is expected to triple to $51 billion by 2011 from $16.3 billion in 2005-06.
 Key Players in Indian Industry Airlines on International Routes

Air India is the national flag carrier airline of India with a network of passenger and
cargo services worldwide. It is one of the two state-owned airlines in the country, the
other being Indian Airlines. Air India has 44 world-wide destinations. The airline has
been profitable in most years since its inception. In the financial year ending March 31,
2006, Air India has made a net profit of Rs.97 million; earned revenue of Rs. 87, 480
million - representing a growth of almost 15 per cent over the previous year.

Jet Airways a regular airline which offers normal economy and business class seats.
Jet Airways, is the only airline which survived the dismal period
of 1990s when many private airlines in India were forced to close down. Jet Airways is
an airline based in India serving domestic and international routes. The airline operates
over 300 flights to 43 destinations across the world. It currently controls about 32% of India's
market.
 Airline market
Airlines on Domestic Routes

Spice Jet is a low-cost airline. Their marketing themes are "offering low’’ “everyday spicy
fares” and “great guest services to price conscious travelers". Their aim is to compete with the
Indian Railways passengers travelling in AC coaches.
Go Air- The People‘s Airline, a low cost carrier promoted by The Wadia Group is a
domestic budget airline based in Mumbai, India established in June 2004. It‘s a relatively
small player as compared to other low cost airlines.

Kingfisher Airlines was an airline based in Bangalore, India. Services started on 9 May
2005, following the lease of 4 Airbus A320 aircraft. It initially operates only on domestic routes.
The airline promises to suit the needs of air travelers and to provide reasonable air fares.
Kingfisher were pushing for an amendment of the present Indian government rule which
requires an airline to fly a minimum of five years on domestic routes before it can start flying
overseas. It has now been grounded.

IndiGo Airlines is a private domestic airline based in India. IndiGo placed an

order for 100 Airbus A320 aircraft during the 2005 Paris Air Show. The total order was
worth US $6 billion; one of the highest by any domestic carrier during the show. The new low-fare
carrier has started operations from August 4, 2006.

Vistara is a new airline based in Gurgaon with its hub at IGI airport, Delhi. It is a joint venture
between TATA sons and Singapore Airlines. It commenced operations on 9 January 2015. It
operates to 15 domestic destinations with a fleet of 9 Airbus A320-200. It is the first airline to
introduce premium economy seats on domestic routes.
 GLOBAL SCENARIO

At the macro-economic level Asia Pacific growth is impressive. India and China are
growing between 8 and 10% each year. China is now the world's 4th largest economy.
Excluding Japan, Asian economic growth was 7%—doubles the world average of 3.5%.
Global airline traffic is expected to rise steadily until 2008 in line with an anticipated
good performance by the world economy, according to the United Nations'(UN) Airline
agency. The UN International Civil Airline Organization found in its medium-term
forecast that airline traffic would grow 6.1 per cent in 2006, 5.8 per cent in 2007, and 5.6
per cent in 2008. And strong economic growth will continue. But growth means nothing
if the bottom line is red. Globally airlines lost US$6 billion in 2005. US carriers lost
US$10 billion. European carriers made about US$1.3 billion. Asian carriers led
profitability with US$1.5 billion. Even within Asia it is a mixed picture. Some carriers
are among the most profitable. Others however are struggling. In the region operating
margins averaged less than 2%, still the best performance in the world. Most are below
the 7 to 8% needed to cover the cost of capital and give investors an acceptable return.

Impact of Rising Fuel Prices on the Industry

The high price of fuel is killing the profitability. In two years the industry fuel bill more
than doubled to nearly US$100 billion—23% of operating costs. And there is no relief in
sight. So what are airlines to do? Improve efficiency is the answer. Progress to date has
been dramatic. The break-even price of fuel rose from US$22 per barrel in 2003 to nearly
US$50 in 2005. Unfortunately, fuel prices are above that. Airlines will not return to
profitability until 2007 when we expect a break-even fuel price of US$55. Even then the
projected profit is only US$6 billion. Asia will remain profitable in 2006 posting US$2
billion in profit. But do not start opening the Champagne. That is still less than a 2% net
margin.
 Global Impact of LCCs

Low cost carrier competition is new to this region. Asian network carriers are better
prepared than many of their US or European counterparts. Their operating costs are 6 US
cents per ATK on route lengths of 1500km. But the competition will also be tough. Air
Asia's costs are the lowest in the world—2.5 US cents per ATK. Labor costs in Asia are
the lowest in world—19% of operating cost. This is a significant advantage against US
and European carriers with an average cost of above 30%. If we compare Asian network
carriers to their low cost rivals, the story changes. Average labor costs can be up to 7
times lower at low-cost startups. There is no finish line in the race to reduce costs and
improve efficiency. Some analysts are of the view that countries in the Asia-Pacific
region, which entered the industry much later, have emerged as important players in the
past decade. In comparison, the Indian civil Airline industry which is much older still
operates from a small base even though its domestic market potential and skilled man
power should have given it intrinsic advantages to emerge as a globally important player
in the civil Airline industry by now.

Path Forward for India

The escalating fuel bill would eventually translate into costlier air tickets for the Indian
travelers, who have for the first time sampled air travel at fares that match first-class
railway tickets.
Even as some airlines hiked fares by ten per cent and others toyed with the idea to offset
their ballooning fuel bill, the government dealt them another blow by withdrawing the
withholding tax exemption on aircraft lease agreements. In the absence of this tax
exemption, aircraft leasing cost is expected to shoot up between 20 to 67 per cent - a
move that could deter new entrants and existing players from leasing more aircraft.
Although poor airport infrastructure remains a concern, we need to maintain a positive
outlook on the sector as the government allows private participation and FDIs in
construction and maintenance of air-traffic infrastructure. This also hints at the huge
opportunity in terms of infrastructure development and maintenance in the Airline sector
for foreign construction and engineering companies. For now, as more and more Indians
take to the skies, the country is set to emerge as the fastest growing Airline market.
The Airline Industry

The airline industry has remained an exception globally, to the process of economic
liberalization. Globally, the airline industry remains subject to several restrictions – in terms of
both operations and of ownership & control. All countries impose restrictions in this one sector;
restrictions that benefit national entities; and debar foreign.

International practice

A majority of the countries - both in the developed and the developing world - have imposed a
49% ownership limit in the airline industry. This is true for Singapore, China and a host of other
nations across Asia and Europe.

The US, otherwise a free economy, is even more restrictive in the Airline sector. US limit the
amount of foreign ownership in its domestic airlines to a maximum of 25%. The US Congress
has repeatedly opposed any changes in the current legislation that restricts foreign ownership
of US airlines – thereby not allowing the foreign ownership of voting stock in US airlines to go
up from 25 to 49 percent. In the past few months, the US Congress and Department of
Transportation have thwarted attempts to allow greater foreign ownership of US carriers, and
turned down Richard Branson’s initiative to create a foreign-owned US-based low cost airline.

Canada too has stayed with a 25% foreign ownership limit in Canadian airlines. Again, the
Canadian Transport Ministry has rejected calls for any increase, saying that an increase would
not benefit Canadian carriers.

Most other countries have similar protective provisions limiting ownership of their airlines.
India imposes a 49% ownership limit in the airline industry.

Australia is perhaps the only notable exception. The Australian government allowed Richard
Branson to start up an airline called Virgin Blue. In return for this permission however, Sir
Richard had to agree that the airline would be incorporated in Australia under Australian law,
and that it would be staffed and managed by Australians, and have an Australian board of
directors.
IATA Stand

The International Air Transport Association (IATA), which is the apex body globally for the
airline industry, too recognizes that most countries have traditionally imposed limits on foreign
ownership and control of airlines. While continuing to work towards increased liberalization in
the airline industry, IATA believes that foreign ownership limits in the airlines is a choice of each
sovereign nation; and needs to be decided by the individual state.

Restrictions even beyond FDI

Going beyond foreign ownership limits, even bilateral air service agreements contain
restrictions on the number of airlines and frequency of services on many international routes.
Open-skies bilateral agreements also do not remove nationality rules.

Sovereignty and national-interest are usually the reasons that most countries do not allow fair
free open-market competition in their respective airline industries.

While FDI benefits industry sectors...

Given the experience in numerous other sectors of the economy – like manufacturing, telecom,
banking among others – foreign investment is generally desirable and leads to efficiency and
scale gains. FDI brings in competition, lowers prices and accords choice to consumers. All round
liberalization in foreign investment rules also allows domestic companies to diversify and
explore investment opportunities in other markets.

The airline industry in India is passing through its most competitive phase to date, where both
the legacy and the newly entered low-cost carriers alike are engaged in fierce competition; and
are adding capacity, adding routes, adding features & products and dropping prices. The
aggressive route expansion plans of the Indian carriers have already resulted in excess supply
over a deficient infrastructure – leading to congestion on the ground; and congestion in the
skies.

A further FDI allowance in airlines in India would only impact adversely, the financial health and
future of India’s own homegrown carriers; and also the civil Airline sector.
Airline industry is an exception to free FDI globally

Foreign investment in airlines should however not be a one-way street where a country offers
access and makes foreign ownership allowance, without reciprocity from others. While Open
skies is a desirable long-term outcome, it cannot be achieved by a single nation alone.

Airlines are an important part of the national economy and it is important that in making
allowances and concessions to international players, the health of the Indian carriers be also
kept firmly in sight.

It is important that India should seek reciprocal opening of Airline industry in other countries,
before allowing open access of its market to foreign carriers.

India also currently does not allow direct or indirect equity participation by foreign airlines in
Indian carriers. In an environment where restrictive foreign ownership in the Airline industry is
the norm, this protects the foreign carriers from both targeting Indian carriers for acquisition;
and also using bilateral air service rights to their advantage.

Airlines are more than just Airlines

The key challenge for India's civil Airline sector is not 'more airlines', but more infrastructure.
India allows 100% FDI in Greenfield airports and this is a good example of both proactive
government policy and also a deep focus on 'national priorities'. Additional airlines and foreign
owned carriers will certainly mean more aircraft & more congestion.

 Foreign participation in India's civil Airline sector could be leveraged in areas where both
the need and the opportunity, is greater. The government could consider opening up
foreign investment in non-scheduled operations, charter flights, ground handling,
Maintenance Repair & Overhaul (MROs) and other non-core-airline functions of the
Airline sector.
 There is a need for building the avionics and Airline equipment capabilities of Indian
industry. The government could provide special incentives allowing global majors and
Indian industry to invest in avionics and equipment.
 Given the acknowledged competence and expertise of skilled Indian manpower, which
has brought global recognition (e.g. in the IT sector), Airline provides India an
opportunity to build capacities and capabilities in Airline ; and to invest not only in pilot
& ATC training but also growing the pool of technical & maintenance expertise in Airline
. There could be special incentives and FDI allowances for education and training in the
Airline sector. This would help not only in manning critical functions within the country,
but also for creating employment opportunities for Indian personnel in global Airline
markets.

The Policy on foreign equity participation in the domestic air transport services has
been revised w.e.f 31.1.2008. The present limit of Foreign Direct Investment (FDI) in
Airline sector is as under:

Airports

Greenfield Projects: FDI up to 100% is allowed under the automatic route subject to
sectorial regulations notified by Ministry of Civil Aviation.
Existing Projects: FDI up to 100% is allowed, however beyond 74% FDI, approval of FIPB
is required and also subject to sectorial regulations notified by Ministry of Civil Aviation.

Air Transport Services:

(I) Scheduled Air Transport Service/Domestic Scheduled Passenger Airline

FDI upto 49% and investment by NRI up to 100% allowed on the
automatic route subject to sectorial regulations notified by
Ministry of Civil Aviation and no direct or indirect participation by any foreign
airlines.

(II) Non-Scheduled Air Transport Service/ Non-Scheduled airlines , Chartered

airlines and cargo airlines
FDI up to 74% and investment by Non-Resident Indian (NRI) up to 100%
allowed on the automatic route subject to sectorial regulations
notified by Ministry of Civil Aviation and no direct or indirect participation by
any foreign airlines in Non-scheduled and Chartered airlines. Foreign airlines
are allowed to participate in the equity of companies operating Cargo airlines.
 (III) Helicopter services/seaplane services – FDI up to 100% is allowed on the
automatic route subject to sectoralregulations notified by Ministry of Civil
Airline and approval of Directorate General of Civil Airline (DGCA).
Foreign airlines are allowed to participate in the equity of companies
operating helicopters and Seaplane Services.

Other services under Civil Airline Sector

(I) Ground Handling Services: FDI up to 74% and investment by NRI’s up

to 100% allowed on the automatic route subject to sectorial regulations notified by
Ministry of Civil Aviation and security clearance.

(II) Maintenance and Repair Organizations – FDI up to 100% allowed on the

automatic route subject to sectorial regulations notified by Ministry of Civil Aviation.

(III) Flying training Institutes and Technical Training Institutions – FDI up to 100%
allowed on the automatic route subject to sectorial regulations notified by Ministry
of Civil Aviation and approval of DGCA.

Pitching for open sky policy and 100 percent FDI in airlines sector, an industry study today
urged the government to put in place the proposed civil Airline policy at the earliest and resolve
the vexed issue of international flying norms for local carriers. The joint FICCI-KPMG report on
India Airline 2016 sought finalization of the long-awaited National Civil Airline Policy in the
letter and spirit and also suggested going for open skies along with 100 percent FDI in airlines
and a final decision on the contentious 5/20 Rule. "It may cause some pain initially, but will
make Indian carriers more efficient, quality conscious, passenger centric and global player," the
report said. At present, government allows up to 49 percent investment by a foreign airline in
an Indian carrier. However, it has proposed to hike it to over 50 percent in the draft policy,
unveiled in October last year. The draft National Civil Airline Policy (NCAP), has presented many
interesting proposals to promote growth in the Airline sector and its vision is to enable 300
million domestic ticketing by 2022, although ambitious, highlights the hidden potential of the
Indian Airline sector, the report said. "(The Government should) finalize the long awaited Draft
National Civil Airline Policy in letter and spirit," it said. Observing that for super-charging growth
in the Airline sector, urgent remedial measures are required, the report said India needs to be
promoted as a trade and tourism hub in order to derive synergistic benefits for the Airline
industry. Leading Airline hubs like the US, EU, UAE, Singapore, China etc. have a robust
industrial, trading, maritime and tourism ecosystem that both supports and benefits from their
Airline sector, it said adding close collaboration between the Ministry of Civil Aviation (Mo CA),
related ministries including finance, home, defense, commerce and industry and tourism
among others, as well as regulators and the industry is the need of the hour. The civil Airline
market in India grew rapidly in the past year. During April-December, the throughput of
international and domestic passengers stood at 164 million which is an increase of 17 percent
over the same period in the last financial year, it said. The report also called for developing
investor-friendly regulatory policies to encourage greater private sector investments in airports,
MRO, cargo, ground handling, general Airline, helicopters and ATF infrastructure.

Civil Airline policy gets delayed; likely in early next fiscal

The new civil Airline policy is expected to be finalized early next financial year with the
government still working on certain issues including those related to the 5/20 international
flying norm. The draft policy was unveiled in October last year and after extensive consultations
with various stakeholders, some issues are still being sorted out. Civil Aviation Secretary R. N.
Choubey today said the ministry plans to finalize the Cabinet note for the policy by the end of
this month after sorting out certain issues. The policy was expected to be finalized in the
current financial year as certain proposals were to be implemented from April 1, 2016. Speaking
on the sidelines of the India Airline -2016 event here, he said as many as 15 variations are being
looked at with respect to the 5/20 rule. Under the norm, only those airlines having at least five
years of domestic flying experience and a minimum of 20 aircraft are allowed to fly overseas. A
tussle has ensued between established carriers and startup airlines over the 5/20 norm with
the latter seeking scrapping of it. While startup carriers Vistara and Air Asia India, where Tata’s
is a stakeholder, are demanding that the rule be done away with, the grouping of four private
Indian carriers comprising IndiGo , Spice Jet , Jet Airways and Go Air wants the rule to
continue. The proposed policy seeks to boost the Indian Airline sector, which has high growth
potential, and strengthen regional connectivity. It has suggested tax incentives for airlines,
maintenance and repair works of aircrafts besides mooting 2 percent levy on all air tickets to
fund regional connectivity scheme. Another significant proposal is for having 50 percent Foreign
Direct Investment (FDI) in domestic carriers in case the open skies policy is implemented. Under
open skies policy, overseas airlines can operate unlimited number of flights into and out of
India. At present FDI limit is percent. Other proposed measures include setting up of no-frills
airports and providing viability gap funding for airlines to bolster regional air connectivity.
To make MRO (Maintenance Repair, Overhaul) cheaper, the government has proposed to
exempt such activities from service tax net and not levy any VAT.
Introduction to Foreign Institutional Investment

Post liberalization period of India has witnessed a rapid expansion and enrichment of
various industrial activities. After the independence India followed a socialist-inspired
approach for most of its independent history, with strict government control over private
sector participation, foreign trade, and foreign direct investment. However, since the early
1990s, India has gradually opened up its markets through economic reforms by reducing
government controls on foreign trade and investment. The privatization of publicly owned
industries and the opening up of certain sectors to private and foreign interests has
proceeded slowly amid political debate.

Foreign Investment refers to investments made by residents of a country in financial assets and
production process of another country. After the opening up of the borders for capital
movement these investments have grown in leaps and bounds. But it had varied effects across
the countries. In developing countries there was a great need of foreign capital, not only to
increase their productivity of labor but also helps to build the foreign exchange reserves to
meet the trade deficit. Foreign investment provides a channel through which these countries
can have access to foreign capital. It can come in two forms: foreign direct investment (FDI) and
foreign portfolio investment (FPI). Foreign direct investment involves in the direct production
activity and also of medium to long-term nature. But the foreign portfolio investment is a short-
term investment mostly in the financial markets and it consists of Foreign Institutional
Investment (FII). The present study examines the determinants of foreign portfolio investment
in the Indian context as the country after experiencing the foreign exchange crisis opened up
the economy for foreign capital. India, being a capital scarce country, has taken lot of measures
to attract foreign investment since the beginning of reforms in 1991. Till the end of January
2003 it could attract a total foreign investment of around US$ 48 billion out of which US$ 23
billion is in the form of FPI. FII consists of around US$ 12 billion in the total foreign
investments. This shows the importance of FII in the overall foreign investment programmer.
As India is in the process of liberalizing the capital account, it would have significant impact on
the foreign investments and particularly on the FII, as this would affect short-term stability in
the financial markets. Hence, there is a need to determine the push and pull factors behind any
change in the FII, so that we can frame our policies to influence the variables which drive-in
foreign investment. Also FII has been subject of intense discussion, as it is held responsible for
intensifying currency crisis in 1990’s elsewhere. The present study would examine the
determinants of FII in Indian context. Here we make an attempt to analyze the effect of return,
risk and inflation, which are treated to be major determinants in the literature, on FII. The
proposed relation (discussed in detail later) is that inflation and risk in domestic country and
return in foreign country would adversely affect the FII flowing to domestic country, whereas
inflation and risk in foreign country and return in domestic country would have favorable effect
on the same. In the next section we would briefly discuss the existing studies. In section 3, we
discuss the theoretical model.

There was a strong growth in Foreign Direct Investment (FDI) flows with three quarters
of such flows in the form of equity. As per the economic survey, the growth rate was 27.4 per
cent in 2005-06, which was followed by 98.4 per cent in April-September 2006. At US$ 4.2
billion during the first six months of this fiscal, FDI was almost twice its level in April-September,
2005. Capital flows into India remained strong on an overall basis even after gross outflows
under FDI with domestic corporate entities seeking a global presence to harness scale,
technology and market access advantages through acquisitions overseas.

Total FDI inflows for April-December 2006 stood at US$ 9.3 billion; as compared to US$
3.5 billion in the corresponding period last fiscal. According to certain estimates, India is likely
to receive US$ 12 billion of FDI during the current financial year as compared to US$ 5.5 billion
in the previous fiscal.

In the past two years, FDI has jumped 100 per cent, from US$ 3.75 billion in 2004-05 to
US$ 7.231 billion till November 2006. However, these figures may be an underestimation, say
Finance Ministry officials, since these numbers do not include the amount that is reinvested by
foreign companies operating in the country. The figure for 2006-07 is likely to be close to US$
10 billion if one takes into account profits reinvested by foreign players in Indian operations.

The number of foreign institutional investors (FIIs) registered with the Securities and Exchange
Board of India (Semi) has now increased to 1,030. In the beginning of calendar year 2006, the
figure was 813. As many as 217 new FIIs opened their offices in India during 2006. This is the
highest number of registrations by FIIs in a year till date. The previous highest was 209 in 2005.
The net investments made by the institutions during 2006 were US$ 9,185.90 million against
US$ 9,521.80 million in 2005.
Some investment highlights of FII

Billionaire investor George Soros-owned fund Dace croft and New York-based investment firm
Blue Ridge are picking 21 per cent equity stake in Anil Dhirubhai Ambani Group's Reliance Asset
Reconstruction Company (Reliance ARC).

Role of Government initiatives

The Government is looking at reviewing regulation involving foreign investments into the
country. Aimed at simplifying the investment process, the revised policy will treat foreign direct
investment (FDI) and investment from foreign institutional investors (FII) in the same light.

At present, investments by GE Capital, for instance, are termed as FII, while funds from GE are
bracketed as FDI. This, despite the fact that GE Capital could be a subsidiary of GE. And in
sectors which have a cap on investments, matters are even more complicated. In such a
situation, treating all foreign investments, irrespective of FDI or FII, as the same in terms of
investment limits and conditions, can be a more workable solution. Once the changes are in
place, the policy will be more in tune with investments in developed countries where the
distinctions between FDI and FII are fast disappearing.

The sectors that will be affected by the revision include asset reconstruction companies, direct-
to-home distribution of broadcast signals and real estate, where separate sub-ceilings or
conditions apply at present for FDI, leaving FII investments outside their ambit.

In a move to bolster investments in the Airline sector, the Reserve Bank of India has said that
FIIs can pick up stake in domestic airlines beyond the sectorial FDI cap of 49 per cent through
secondary market purchases.

Meanwhile, FDI into India is on the verge of surpassing FII for the first time, the Prime
Minister's Economic Advisory Council (EAC) has said. According to the EAC, net FDI for 2006-07
would be around US$ 9 billion, up from US$ 4.7 billion last year while FII or portfolio inflows are
likely to be US$ 7 billion.
Advantages of FII

The advantages of having FII investments can be broadly classified under the following
categories.

A. Enhanced flows of equity capital

FIIs are well known for a greater appetite for equity than debt in their asset structure. For
example, pension funds in the United Kingdom and United States had 68 per cent and 64 per
cent, respectively, of their portfolios in equity in 1998. Thus, opening up the economy to FIIs is
in line with the accepted preference for non-debt creating foreign inflows over foreign debt.
Furthermore, because of this preference for equities over bonds, FIIs can help in compressing
the yield-differential between equity and bonds and improve corporate capital structures.

B. Managing uncertainty and controlling risks

Institutional investors promote financial innovation and development of hedging instruments.

Institutions, for example, because of their interest in hedging risks, are known to have
contributed to the development of zero-coupon bonds and index futures. FIIs, as professional
bodies of asset managers and financial analysts, not only enhance competition in financial
markets, but also improve the alignment of asset prices to fundamentals. 39. Institutions in
general and FIIs in particular are known to have good information and low transaction costs. By
aligning asset prices closer to fundamentals, they stabilize markets. Fundamentals are known to
be sluggish in their movements. Thus, if prices are aligned to fundamentals, they should be as
stable as the fundamentals themselves. Furthermore, a variety of FIIs with a variety of risk-
return preferences also help in dampening volatility.

C. Improving capital markets

. FIIs as professional bodies of asset managers and financial analysts enhance competition and
efficiency of financial markets. Equity market development aids economic development. By
increasing the availability of riskier long term capital for projects, and increasing firms’
incentives to supply more information about them, the FIIs can help in the process of economic
development.

D. Improved corporate governance Good corporate governance is essential to overcome the

principal-agent problem between share-holders and management. Information asymmetries
and incomplete contracts between share-holders and management are at the root of the
agency costs. Dividend payment, for example, is discretionary. Bad corporate governance
makes equity finance a costly option. With boards often captured by managers or passive,
ensuring the rights of shareholders is a problem that needs to be addressed efficiently in any
economy.

Management Control and Risk of Hot Money Flows

The two common apprehensions about FII inflows are the fear of management takeovers and
potential capital outflows.

A. Management control

FIIs act as agents on behalf of their principals – as financial investors maximizing returns. There
are domestic laws that effectively prohibit institutional investors from taking management
control. For example, US law prevents mutual funds from owning more than 5 per cent of a
company’s stock. According to the International Monetary Fund’s Balance of Payments
Manual 5, FDI is that category of international investment that reflects the objective of
obtaining a lasting interest by a resident entity in one economy in an enterprise resident in
another economy. The lasting interest implies the existence of a long-term relationship
between the direct investor and the enterprise and a significant degree of influence by the
investor in the management of the enterprise. According to EU law, foreign investment is
labeled direct investment when the investor buys more than 10 per cent of the investment
target, and portfolio investment when the acquired stake is less than 10 percent. Institutional
investors on the other hand are specialized financial intermediaries managing savings
collectively on behalf of investors, especially small investors, towards specific objectives in
terms of risk, returns, and maturity of claims. All take-overs are governed by SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997, and sub-accounts of FIIs are deemed
to be “persons acting in concert” with other persons in the same category unless the contrary
is established.

B. Potential capital outflows FII inflows are popularly described as “hot money”, because of
the herding behavior and potential for large capital outflows. Herding behavior, with all the FIIs
trying to either only buy or only sell at the same time, particularly at times of market stress,
can be rational. With performance-related fees for fund managers, and performance judged
on the basis of how other funds are doing, there is great incentive to suffer the consequences
of being wrong when everyone is wrong, rather than taking the risk of being wrong when
some others are right. The incentive structure highlights the danger of a contrarian bet going
wrong and makes it much more severe than performing badly along with most others in the
market. It not only leads to reliance on the same information as others but also reduces the
planning horizon to a relatively short one. Value at Risk models followed by FIIs may
destabilize markets by leading to See Bikhchandani, S and S. Sharma (2000): “Herd Behavior in
Financial Markets”, Working Paper No. WP/00/48, International Monetary Fund, Washington
DC, 2000. 15 simultaneous sales by various FIIs, as observed in Russia and Long Term Capital
Management 1998 (LTCM) crisis. Extrapolative expectations or trend chasing rather than
focusing on fundamentals can lead to destabilization. Movements in the weightage attached
to a country by indices such as Morgan Stanley Country Index (MSCI) or International Finance
Corporation (W) (IFC) also leads to en masse shift in FII portfolios.

Another source of concern are hedge funds, who, unlike pension funds, life insurance
companies and mutual funds, engage in short-term trading, take short positions and borrow
more aggressively, and numbered about 6,000 with $500 billion of assets under control in
1998. 50. Some of these issues have been relevant right from 1992, when FII investments
were allowed in. The issues, which continue to be relevant even today, are:

(I) Benchmarking with the best practices in other developing countries that compete
with India for similar investments;
(II) If management control is what is to be protected, is there a reason to put a
restriction on the maximum amount of shares that can be held by a foreign investor
rather than the maximum that can be held by all foreigners put together;
(III) Whether the limit of 24 per cent on FII investment will be over and above the 51
per cent limit on FDI. There are some other issues such as whether the existing
ceiling on the ratio between equities and debentures in an FII portfolio of 70:30
should continue or not, but this is beyond the terms of reference of the Committee.

To conclude Foreign Institutional Investment refers to investments made by residents of a

country in financial assets and production process of another country. After the opening up of
the borders for capital movement these investments have grown in leaps and bounds. But it
had varied effects across the countries. It can affect the factor productivity of the recipient
country and can also affect the balance of payments. In developing countries there is a great
need of foreign capital, not only to increase their productivity of labor but also helps to build
the foreign exchange reserves to meet the trade deficit. Foreign investment provides a channel
through which these countries can have access to foreign capital. It can come in two forms:
foreign direct investment (FDI) and foreign portfolio investment (FPI). Foreign direct
investment involves in the direct production activity and also of medium to long-term nature.
But the foreign portfolio investment is a short-term investment mostly in the financial markets
and it consists of Foreign Institutional Investment (FII). The FII, given its short-term nature,
might have bi-directional causation with the returns of other domestic financial markets like
money market, stock market, foreign exchange market, etc. Hence, understanding the
determinants of FII is very important for any emerging economy as it would have larger impact
on the domestic financial markets in the short run and real impact in the long run. The some
basic objective of the research and methodology used to achieve the project work is presented
in the preceding chapter no II.

FDI by Indian Corporations

Increasing Competitiveness of Indian industry due to globalization of Indian Economy has led to
emergence and growth of Indian multinationals. This is evident from the FDI overseas from
India, which increased by 13.5 times during the last 7 years. The year 2006-07 witnessed large
overseas acquisition deals by Indian corporate to gain market shares and reap economies of
scale, supported by progressive liberalization of the external payments regime. Overseas
investment that started off initially with the acquisition of foreign companies in the IT and
related services sector has now spread to other areas such as manufacturing including auto
components and drugs and pharmaceuticals.

The Ministry of Civil Aviation has shot down a proposal of the Ministry of Commerce & Industry
to increase the FDI cap in scheduled airlines to 74% from the current 49% in wake of the
controversies surrounding the infusion of foreign capital in the Jet-Etihad and Air Asia deals.

A senior official at the ministry said, “We are still testing waters after permitting foreign airlines
to invest up to 49% in scheduled Indian carriers in September last year. A proposal was made by
the Department of Industrial Policy and Promotion (DIPP) to increase FDI cap in scheduled
airlines to 74%. We have turned down the proposal.”

As per the current FDI policy, foreign investment in scheduled air transport services is allowed
up to 49% of the paid-up capital of an Indian carrier under the government approval route,
provided that substantial ownership and effective control of the entity remains with the
domestic company.

“The proposal does not mention that FDI up to 74% in scheduled operators would be allowed
by foreign airlines. But the approval may pave the way for such investment, which may result in
management control shifting of Indian airlines shifting to foreign entities”, added the official.

In what would be of benefit to foreign companies operating out of India, the Ministry of Civil
Aviation has, however, agreed to a proposal to allow up to 100% FDI in non-scheduled air
service operators (NSOPs) under the automatic route in the general Airline sector. This would
allow foreign companies to own private aircraft registered in the country without having to
seek approval of FIPB.
As regards FDI in scheduled air service operators, only recently, the Rs 2058 crore stake sale
deal between Jet and Etihad came under the scanner with market regulator SEBI along with the
ministry of corporate affairs raising objections over issues of effective control of Indian airline
post the acquisition by the West Asian carrier. The civil Airline ministry too has raised concerns
in meeting of Foreign Investment Promotion Board (on June 14) on a plan outlined by the two
airlines to shift some of the operational departments of Jet Airways to Abu Dhabi, which in
effect would mean moving the 'principal place of business' out of India.

The Jet-Etihad deal is the biggest in the Indian Airline sector post the government liberalizing
FDI norms in Airline.
Earlier in March this year, a controversy had erupted over the proposal of Malaysian carrier Air
Asia to set up a Greenfield airline along with Tata Sons and Arun Bhatia of Telestra Tradeplace.
The Ministry of Civil Aviation had held that the policy of allowing foreign carriers to buy up to
49% stake in Indian airlines referred to infusions in existing airlines and not in Greenfield
projects.

The commerce ministry subsequently issued a clarification stating that the policy did not refer
only to the existing airlines and that the spirit of the FDI policy was to get fresh investments
into the country.
LITERATURE REVIEW

The Indian Civil Aviation Industry

The history of Indian Airline Industry dated back to the early 1930s, when one of the leading
Indian business houses, the Tata’s, established Tata Airlines. There was limited activity in the
sector over the next two decades despite eight more private companies entering the airline
industry. In 1953, the Air Corporation Act came into force, and all the assets of the then existing
nine airline companies were transferred to two companies- Indian Airlines Corporation (IA) and
Air India International (Air India). While Air India offered international air services, IA offered
domestic services. The Air Corporation Act 1953 prohibited any person or company to operate
any scheduled air transport services from, to or across India. Therefore, the two corporations
enjoyed a monopoly status in the scheduled air transport services market. In 1962, Air India
International was renamed as Air India Limited.

In 1986, private airlines were allowed to operate chartered and non-scheduled services under
an ‘Air Taxi’ scheme. The scheme was introduced to boost tourism and augment domestic air
services. The carriers were, however, not allowed to publish time schedules or issue tickets to
passengers. The government’s Airline policy was progressively liberalized in the early 1990’s. In
1993, the Air Corporation Act 1953 was abolished, which put an end to the monopoly of IA and
Air India in the scheduled air transport services market. After the abolition of the act, there was
a considerable change in the Indian government’s Airline policy.

From March 1994, the market was opened to any company that fulfilled the statutory
requirements of scheduled airline services. The government approved eight private carriers to
start domestic operations. They were Jet Airways, Air Sahara, Indian International, Archana
Airways, East West Airlines, NEPC Airlines, Modiluft and Damania Airways. While Indian
International was the first licensee after the open skies policy came into force, East West was
the first scheduled airlines to take off from the ground.

In 1995, the Airports Authority of India (AAI) was formed after the merger of the National
Airports Authority (NAA) and the International Airport Authority of India (IAAI). The AAI offered
infrastructure facilities to all airlines. There were five international airports-Delhi, Mumbai,
Kolkata, Chennai and Thiruvananthapuram- for scheduled international
operations by Indian and foreign carriers.
By late 2000, however, most private players went out of business after incurring heavy losses.
The reasons included lack of experience in the Airline field, inadequate planning and poor
promoter support. According to analysts, none of the private carriers had the staying power or
the professional expertise required for the Airline industry.

As a result, by mid-2001, only Jet Airways (JA) and Sahara managed to stay afloat among the
private carriers. In fact, they went step ahead by grabbing a major market share from Indian
Airlines, which had been enjoying a monopoly. By mid-2001, JA commanded 42% of the
domestic market and Sahara claimed for 13% leaving and 39% for Indian Airlines as per financial
year 2003-04.

The September 11, 2001, terrorist attacks in the US affected the global airline industry.
Reportedly, the industry suffered a loss of 418 ban and about 400,000 Airline related jobs were
lost. However, the Indian Airline industry was not badly hit by attack.

In early 2003, the Indian government expressed concerns that the civil Airline industry
remained a part-monopoly, with only three players. To introduce more reforms, in August
2003, the government established a committee under the chairmanship of Naresh Chandra,
former cabinet secretary, to prepare a road map for a civil Airline policy. The committee
recommended that the foreign direct investment limit in the domestic civil Airline sector should
be increased to 49% from the permitted 40%, which the government accepted. The
government also stressed the need for making air travel more affordable. The
recommendations were accepted and excise duty on Aviation Turbine Fuel (ATF) was cut to 8%
from 16%. The government also did away with the 15% inland air travel tax (IATT).

By August 2006, the government started reviewing other guidelines pertaining to the Airline
sector including the ban on financial arrangements with foreign airlines for lease finance, hire
purchase and other loan arrangements. The existing policy prevented any such financing
arrangements. Industry analysts realized that the government was clear in its intention of
bringing air travel within the reach of the common man. Taking advantage of liberal policies, Air
Deccan started operating in short-haul routes in all over India.

Aiming to compete with their rivals in the international market, the fast-growing Indian airlines
are looking at global platforms to widen their overseas presence.

In 2008 the two Indian international carriers, Air India and Jet Airways, currently have less than
25% share in the long-haul market to and from the country. With the third carrier Kingfisher
Airlines joining the ranks this month, the Indian Airline scenario is all set to change.
Kingfisher Airlines, which is started its international operations on September 3 with a
Bangalore-London flight, is considering options to join the SkyTeam Alliance led by Air France-
KLM and Delta Airlines of the US. The national carrier, Air India, has already joined the Star
Alliance, the world's largest airlines consortium led by Lufthansa and Singapore Airlines.

Mumbai-based Jet Airways could eventually become the Indian partner of the Oneworld
Alliance, led by British Airways and American Airlines, according to industry sources. Under
such global alliances, airlines agree to co-operate, tie up to provide better connectivity to
international passengers, share terminals as well as expertise in back-end operations.

Indian airlines are aiming for a greater presence in the lucrative international market with the
ambition of taking market share from the large number of international carriers such as
Singapore Airlines, Emirates, Lufthansa and British Airways, which dominate international
traffic to and from India.

Kingfisher executives said that it would be “most logical” for the airline to eventually join the
SkyTeam alliance, given the growing links with the Air France-KLM. It is a bit early to comment
on our global alliance plans, but we are already looking at developing synergies with Air France-
KLM, which are providing back-end technical support in London to our aircraft. Kingfisher has
already entered into a maintenance and technical support pact with Air France-KLM for its wide
bodied aircraft used in international operations.

Meanwhile, Jet Airways is currently evaluating our options. They have not decided to join any
alliance as of now. There are no specific time frames. The airline industry is going through a
phase of consolidation and airline groupings could also possibly change in the immediate
future. The recent example being Continental exiting the SkyTeam and joining Star Alliance.

Jet Airways currently has frequent-flier program partnerships with 16 carriers and has
codeshare partnerships with Qantas, American Airlines, Brussels Airlines, Etihad Airways and Air
Canada.
COMPETITIVE SCENARIO

Change is the only constant in Airline these days. Just as the industry posted its first profit since
2000 — $5.6 billion last year — oil prices rose to historic levels, and a potential economic
downturn threatens revenues.
At one point, Asia seemed immune to many of the woes of the industry. Airline supports 10.5
million jobs across Asia Pacific. And that, in turn, supports $807 billion in business. Traffic in the
region is still growing at breakneck speed. By 2010, Asia will be the largest single market for
Airline.

Growth brings challenges and responsibilities. The first challenge is a healthy one —
competition. Everyone wants a piece of the pie. Look at the Middle-East, which is positioning
itself as a global air hub. Already, Dubai handles nearly as much traffic as Changi. And with 159
destinations, it is connected to 37 per cent more destinations. Its proposed super airport at
Jebel Ali will be the world’s biggest, handling up to 140 million passengers a year.

The second challenge is the supply of skilled personnel. To operate the 16,000 new aircraft that
will be required to meet demand in 2020, 17,000 new pilots must be trained each year. That is
40,000 more than current training capacity.

And the third challenge is declining profitability. Capacity expansion of nearly 40 per cent in the
region saw absolute profitability go from $1.7 billion in 2002 to an estimated $900 million last
year. Margins fell from 4 per cent to less than 1 per cent over the same period.

Innovation and change

Challenges are opportunities for innovation and change. I see the biggest opportunities in the
areas of liberalization, security and environment.

The Asian decision to liberalize traffic between capital cities in 2008 moves airlines towards the
same commercial freedoms that other businesses take for granted. The archaic bilateral system
requires government to negotiate international markets and keeps the industry fragmented.
The largest airline represents only 5 per cent of total traffic. And in Asia 13 airlines compete to
provide just 50 per cent of the market.
Europe has proved that cross-border consolidation is politically acceptable. And the bottom-line
numbers of Lufthansa, Swiss and Air France-KLM show that it can be profitable too.

If Asia acts as a region, it can balance the traditional leadership of the US and Europe. The
failure of last year’s US-EU open skies agreement to address ownership put the baton of
industry leadership up for grabs. It is time for Asia to be bolder and explore new ways of doing
business.

It could develop a new model for the relationship between industry and government that
allows the air transport industry to deliver even greater economic benefits. Perhaps it could
even develop an institution for regional co-ordination of air policy issues, so that Asia is as
strong in building the future of our industry as it is in building great airlines and airports.

Security is a ready-made project for regional coordination. Six years after 9/11, the industry is
more secure. But the system remains an uncoordinated mess. We have not harmonized
measures across borders. Shoes on or off? Laptop in or out? Belt and coat on or off? The
answers are different at every airport. What message does that send to passengers?

Singapore signed an agreement with the EU to harmonies the security of duty-free items. Good
job. Now we need to find a leadership method to turn this into a regional solution that is a
building block for global harmonization.

OBJECTIVE
1. To study the present status of FDI in India.
2. To study the impact of FDI in Airline industry.
3. To study the role of government in boosting FDI in the country
4. To study the trend and pattern of flow of FDI in Airline Industry.
5. To know the current overall industry position and how can it be developed in future
Types of FDI

 Greenfield Investment: Direct investment in new facilities or the expansion of existing

facilities. Greenfield investments are the primary target of a host nation’s promotional
efforts because they create new production capacity and jobs, transfer technology and
know-how, and can lead to linkages to the global marketplace. However, it often does this
by crowding out local industry; multinationals are able to produce goods more cheaply
(because of advanced technology and efficient processes) and uses up resources (labor,
intermediate goods, etc.). Another downside of Greenfield investment is that profits from
production do not feed back into the local economy, but instead to the multinational's
home economy. This is in contrast to local industries whose profits flow back into the
domestic economy to promote growth.

 Mergers and Acquisitions: Mergers and acquisitions occur when a transfer of existing assets
from local firms to foreign firms takes place; this is the primary type of FDI. Cross-border
mergers occur when the assets and operation of firms from different countries are
combined to establish a new legal entity. Cross-border acquisitions occur when the control
of assets and operations is transferred from a local to a foreign company, with the local
company becoming an affiliate of the foreign company. Unlike Greenfield investment,
acquisitions provide no long term benefits to the local economy-- even in most deals the
owners of the local firm are paid in stock from the acquiring firm, meaning that the money
from the sale could never reach the local economy. Nevertheless, mergers and acquisitions
are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI
flow into the United States.

 Horizontal Foreign Direct Investment: Horizontal foreign direct investment is investment in

the same industry abroad as a firm operates in at home. Horizontal FDI help to create
economies of scale because the size of the firm becomes large to reap the advantage and
gains.

 Vertical Foreign Direct Investment: the vertical integration occurs among the firm involved
in different stage of the production of a single final product. For example if oil exploration
firm and refinery firm merges together. It will be called vertical direct investment. Vertical
investment reduces transportation cost, and of communication and coordinating
production.
 Vertical direct investment takes in two forms:

1) Backward vertical FDI: where an industry abroad provides inputs for a firm's domestic
production process

2) Forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic
production processes.

Capital flows and growth in India

Capital flows into India have been predominantly influenced by the policy environment,
recognizing the availability constraint and reflecting the emphasis of self-reliance, planned
levels of dependence on foreign capital in successive Plans were achieved through import
substitution industrialization in the initial years of planned development. The possibility of
export replacing foreign capital was generally not explored until the 1980s. It is only in the
1990s that elements of an export led growth strategy became clearly evident alongside
compositional shifts in the capital flows in favor of commercial debt capital in the 1980s and in
favor of non-debt flows in the 1990s. The approach to liberalization of restriction on specific
capital account transaction however, has all along been against any big-bang.

A large part of the net capital flows to India in the capital account is being offset by the debit
servicing burden. As a consequence, net resource transfer has fluctuated quite significantly in
the 1990s turning negative in 1995-96. Till the early 1980s, the capital account of the balance of
payment had essentially a financing function. Nearly 80 percent of the financing requirement
was met through external assistance. Aid financed import were both largely.

Ineffectual in increasing the rate of growth and were responsible for bloating the inefficient
public sector. Due to the tied nature of bilateral aid, India has to pay 20 to 30 percent higher
prices in selection to what it could have got through international. The real resource transfer
associated with aid to India, therefore, was mush lower. There were occasions “when India
accepted bilateral aid almost reluctantly and without enthusiasm because of the combination
of low priority of the project and the inflated process of goofs” The environment for enhancing
aid effectiveness has been highlighted as one of the key factor in the assessments of aid by
donors, i.e. :open trade secured private property rights, the absence of corruption, respect for
the rule of law social safety nets, aid sound macroeconomic and financial policy” the report pf
the High Level committee on Balance of Payments 1993 identified a number of factors
constraining effective aid utilization on India and underscored the need to initial urgent action
on both redacting the overhang of unutilized aid and according priority to externally sided
projects in terms pf plan allocations and budgetary previsions. Net resource transfer under aid
to India, however turned negative in the second half of the 1990s.

In the 1980s, India increased its reliance on commercial loans as external assistance increasingly
fell short of the growing financing needs. The significant pressures on the balance of payments
as the international oil prices more than doubled in 1979-80 and the world trade volume
growth decelerated sharply during 19980-82, triggered an expansion in India’s portfolio of
capital inflows to include IMF facilities, greater reliance on the two deposit schemes for
nonresident Indian the Non- Resident External Rupee Accounts (NRERA) (that started in 1970)
and foreign currency Non Resident Account (FCNR) (that started in 1975) and commercial
borrowings on a modest scale. A few select banks all Indian financial institutions leading public
sector undertakings and certain private corporate were allowed to raise commercial capital
from, the international market in the form of loan, bonds and euro notes. Indian borrowed
received final terms in the 1980s Spreads over LIBOR for loan to India improved gradually from
about 100 basis points in the early 1980s to about 25 basis points for PSUs (50 basis points for
private entitles) towards end of 1980s. Maturities were elongated from seven year to ten year
during this period. Debt sustainability indicators, particularly debt/GDP ratio and debt service
ratio, however, deteriorated significantly during this period.

The policy approach to ECB has undergone fundamental shift sine then with the institution of
reformer and external sector consolidation in the 1990s. Ceilings are operated on commitment
of ECB with sub ceilings for short term debt. The ceiling on annual approvals has been raised
gradually. The force of ECB policy continuous to place emphases on low borrowing cost (by
specifying the spread on LIBOR or US TB rates), lengthened maturity profited (liberal norms for
above 8 years of maturity) and end use restrictions.

Given the projected need for financing infrastructure project, 15 percent of the total
infrastructure financing may have to come from foreign sources. Since the ratio of
infrastructure investment to GDP is projected to increase from 5.5 percent in 1995-96 to about
8 percent by 2006, with a foreign financing of about 15 percent foreign capital of about 1.2
percent of GDP has to be earmarked only for the infrastructure sector to achieve a GDP growth
rate of about 8 percent.

NRI deposits represent an importance avenue to access foreign capital. The policy framework
for NRI deposit during 1990s has offered increased options to the NRIs through different
deposit schemes and by modulation rate of return maturities and the application of cash
reserve ratio (CRR) in the 190s FCNR (B) deposit rates have been linked to LIBOR and short term
deposits are discouraged. For NRERA, the interest rate is determined by banks themselves. The
nonresident Rupee deposit (NR (NR) RD) introduced in June 1992 is non reparable although
interest earned is fully reparable under the obligation of current account convertibility
subscribed to in 1994. In the 1990s NRI deposit remained important sources of foreign capital
with outstanding balances under various schemes taken together rising from about US $10
billion at the close of 1980s to US $ 23 billion at the close of 2001. Capital flows from NRIs have
occasionally taken the form of large investment in specific bonds, i.e. the Indian Development
Bond (IDB) in 1991, the Resurgent Indian Bond RIB) in 1998 and Indian Millennium Deposit
(IMD) in 2000.

The need for supplementing data capital with non-debt capital with a clear prioritization in
favor of the latter has characters the government policy framework from capital flows in the
1990s. The high level committee on balance of payments recommended the need for
achievement this composition shift. A major shift in the policy stance occurred in 1991-92 with
the liberalization of norms for foreign direct a portfolio investment in India.

The liberalization process started with automatic approval up to 51 percent for investment in
select areas. Subsequently the areas covered under the automatic route and the limits of
investment were raised gradually culminating in permission for 100 percent participation in
certain areas (particularly oil refining telecommunications, and manufacturing activities in
special economic zone). The requirement of balancing the dividend payments with export
earnings which was earlier limited to a short list of 22 consumer goods items was completely
withdrawn. Limit for FDI in projects relating to electricity generation, transmission and
distribution has been removed. FDI in non-bank financial activities and insurance is also
permitted. Restriction on portfolio investment through purchased of both traded primary and
secondary market Indian securities are also liberalized. As opposed to the earlier restriction
permitting non- resident Indian (MRIs) overseas corporate bodies (OCBs) to acquire up to 1
percent for foreign institutional investor (FIIs)/NRIs/OCBs while allowing investment by FIIs in
September 1992. Subsequently the aggregate limit was raised gradually and presently for FDI
investment in different sector provided the general body of the respective firms takes a
decision to that effect. Portfolio investment in Global Depository Receipts (GDRs) /American
Depository Receipts (ADRs) /Foreign currency convertible bonds (FCCBs) floated by Indian
companies in international markets is also permitted.

It is difficult to assess the direct contribution of these flows particularly FDI to the growth
process. Anecdotal evidence suggests that foreign controlled firms often use third party export
to meet their export obligations. Another factor that contributes to widening the technology
gap in FDI in India is the inappropriate intellectual property (IP) regime of India. Survey results
for 100US multinationals indicate that about 44 percent of the firms highlighted the weak IP
protection in India as a constraining factor for transfer of new technology to Indian subsidiaries.
For investment in sector like chemicals and pharmaceuticals almost 80 percent of the firms
review Indian IP regime as the key constraining factor for technology transfer. Information
collected from annual surveys of select foreign controlled rupee companies (FCRCs)/FDI
companies on the export intensity of FCRC/FDI firms during the 1980 and 1990 shows that
these firms export only about 10 percent of their domestic sales and the export intensity has
increased only modestly in the 1990. It appears that the lure of the large size of the domestic
market continues to be one of the primary factor causing FDI flows into India.

Spillover of positive externalities associate with FDI in the form of transfer of technology is also
highlighted as another factor that could contribute to growth. The relationship between
technology imports comprising impost of capital goods and payment for royalty and technical
know-how fees) and domestic technology efforts in terms of R & D expenditure does not
exhibit any complementarily foreign exchange spent on technology import as percentage of
domestic expenses on R & D rather increased significantly in the 1990 in relation to 1980
suggesting the use of transfer patterns of resource transfer. The share of imported raw
materials in total raw materials used by FDI firms however, outperformed the overall growth in
industrial production in the 1990.

Foreign direct investment

Foreign direct investment (FDI) is defined as a long term investment by a foreign direct investor
in an enterprise resident in an economy other than that in which the foreign direct investor is
based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together
form a transnational corporation (TNC). In order to qualify as FDI the investment must afford
the parent enterprise control over its foreign affiliate. The UN defines control in this case as
owning 10% or more of the ordinary shares or voting power of an incorporated firm or its
equivalent for an unincorporated firm.

In the years after the Second World War global FDI was dominated by the United States, as
much of the world recovered from the destruction wrought by the conflict. The U.S. accounted
for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960.
Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive
preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks
now constituting over 20% of global GDP. In the last few years, the emerging market countries
such as China and India have become the most favored destinations for FDI and investor
confidence in these countries has soared. As per the FDI Confidence Index compiled by A.T.
Kearney for 2005, China and India hold the first and second position respectively, whereas
United States has slipped to the third position.
REVIEW OF LITERATURE

Boliden (1997) provides another way in which changes in the exchange rate level may affect
inward FDI for a host country. If FDI by a firm is motivated by acquisition of assets that are
transferable within a firm across many markets without a currency transaction (e.g., firm
specific assets, such as technology, managerial skills, etc.), then an exchange rate appreciation
of the foreign currency will lower the price of the asset in that foreign currency, but will not
necessarily lower the nominal returns. In other words, a depreciation of a country’s currency
may very well allow a “fire sale” of such transferable assets to foreign firms operating in global
markets versus domestic firms that may not have such access. Boliden uses industry-level data
on Japanese mergers and acquisition FDI into the US to test this hypothesis and finds strong
support of increased inward US acquisition FDI by Japanese firms in response to real dollar
depreciations relative to the yen. As predicted, Boliden finds that these exchange rate effects
on acquisition FDI are primarily for high-technology industries where firm-specific assets are
likely of substantial importance.

Other studies have generally found consistent evidence that short-run movements in exchange
rates lead to increased inward FDI, including Grubert and Mutti (1991), Swenson (1994), and
Kogut and Chang (1996), with limited evidence that the effect is larger for merger and
acquisition FDI (see, e.g., Klein and Rosengren, 1994). Thus, the evidence has largely been
consistent with the Froot and Stein (1991) and Boliden (1997) hypotheses. One serious issue in
the literature is that these exchange rate effects have been tested almost exclusively with US
data, though some studies have focused on US outbound FDI, while others have used US
inbound FDI.

Campa (1993) lays out a much simpler and (perhaps more) elegant approach than Cushman
(1985) to examine how exchange rate uncertainty affects FDI based on options theory in Dixit
(1989). Greater exchange rate uncertainty increases the option for firms to wait until investing
in a market, depressing current FDI. Campa finds evidence for this using data on FDI into the US
in the wholesale industry. Again, a broader firm-level database would be likely preferred to test
these hypotheses and Tomlin (2000) also points out that the Campa (1993) estimates are
sensitive to empirical specification. A related paper by Goldberg and Kolstad (1995)
alternatively hypothesizes that exchange rate uncertainty will increase FDI by risk averse MNEs
if such uncertainty is correlated with export demand shocks in the markets they intend to
serve. They confirm this hypothesis with empirical analysis relying on quarterly bilateral data on
US FDI with Canada, Japan, and the United Kingdom.
Other studies have generally found consistent evidence that short-run movements in exchange
rates lead to increased inward FDI, including Grubert and Mutti (1991), Swenson (1994), and
Kogut and Chang (1996), with limited evidence that the effect is larger for merger and
acquisition FDI (see, e.g., Klein and Rosengren, 1994). Thus, the evidence has largely been
consistent with the Froot and Stein (1991) and Boliden (1997) hypotheses. One serious issue in
the literature is that these exchange rate effects have been tested almost exclusively with US
data, though some studies have focused on US outbound FDI, while others have used US
inbound FDI
Research methodology
Research methodology is a way to systematically solve the researcher’s problem or it may be
understood as a science of studying how research is done scientifically. It defines various steps
that are adopted by a researcher in studying his research problem along with logic behind
them.

STEPS FOLLOWED WHILE CARRYING OUT THE RESEARCH PROCESS

Define the research problem and its
objectives

Review concepts and theories

Research design including sample

design

Collection of data survey

Analysis of data

Interpretation and report writing

The research consisted of two stages. In the first stage, a survey was conducted to collect the
data about the people. The second stage involved analysis of the data collected in the first
stage.

No. of samples collected: 100

Location: India
In order to accomplish this project successfully we will take following steps.
Data collection:
Secondary Data:
Internet, Books, newspapers, journals and books, other reports and projects, literatures

FDI:

The study is limited to a sample of India only and sectors e.g. service sector, computer
hardware and software, telecommunications etc. which had attracted larger inflow of FDI from
different countries.
DATA ANALYSIS AND INTERPRETATION

Q1. Do you think that Indian Airline sector will get affected w.r.t FDI?

a) Yes 59
b) No 41

No
41%

Yes
59%

Q2. Are you aware of the term Foreign Direct investment (FDI)?

a) Yes 60
b) No 40

no
40%

yes
60%
Q3. Are you aware of the FDI issue in Indian Airline?
a. Yes 70
b. No 30

No
30%

Yes
70%

Q4. What do you think how it will affect Indian Airline industry? If 51% FDI is permitted?
a) Positive impact 50
b) Negative impact 30
c) No impact 15
d) Cant’ say 5

cant’ say
5%

no impact
15%

positive impact
negative impact 50%
30%
Q5. If 51% FDI is granted, will you…

a. Welcome it 65
b. revolt it 25
c. take no action 10

take no
action
10%

revolt it
25% Welcome it
65%

Q6. How much do you agree with the saying FDI is always fruitful for the country?
a) Strongly agree 30
b) Agree 20
c) Disagree 30
d) strongly disagree 20

Chart Title
stronlgy disagree
20% strongly agree
30%

disagree
30% agree
20%
Q7. What’s your opinion if you are asked whether FDI should be allowed for 51%?
a) Yes, it should be allowed 78
b) no. it should not be allowed 22

it should not Chart Title

be allowed
22%

it should be
allowed
78%
CONCLUSION
From the discussion above we can conclude:

(1) Growing economy and increasing purchasing power would

more than compensate for the loss of market share of the
unorganized sector in Airline Industry.
(2) FDI will boost the Indian aviation industry resulting in
benefits for the airline industry.
(3) Consumers would certainly gain from enhanced competition,
better quality of services provided by competing airlines.
(4) The government revenues will rise on account of larger
business as well as recorded sales.
(5) The Competition Commission of India would need to play a
proactive role.

In accordance with the requirements set forth by the Ministry of Corporate Affairs of the
Government of India, this report analyzed competition inhibiting provisions of statutes,
rules, policies and practices found within the regulatory framework of India‘s civil Aviation
sector. This report broadly analyzes India‘s Civil Aviation sector, while recognizing the
necessity that deeper assessments of each sub-sector of India‘s Civil Aviation must be
undertaken individually. While assessing India‘s Civil Aviation sector‘s regulatory
framework, certain provisions that limit competition within the industry came to light. All
regulations were analyzed and categorized by looking at whether or not they limit the
number and range of suppliers, limit the suppliers’ ability to compete, reduce the incentive
of the suppliers to compete, and affect investment.
BIBLIOGRAPHY

 Agarwal, J. (1980) ‘Determinants of Foreign Direct Investment: A Survey’,

Weltwirtschaftliches Archiv 116, 739-773.
 Athreye S and Kapur S. (2001) Private Foreign Investment in India: pain or Panacea, World
Economy, 24, 399-424.
 Bajpai. N. and Sachs.J.D. (2000) Foreign Direct Investment in India: Issues and Problems,
Development Discussion Paper No 759, Harvard Institute for International Development.
 Kidron, M. (1965) Foreign Investments In India, London, Oxford University Press
 Kokko, A. (1994), Technology, Market Characteristics, and Spillovers, Journal of
Development Economics, 43, 279-293
 Kumar, N. (1990) Multinational Enterprises in India (Routledge: London)
 Kumar, N. (1994) Multinational Enterprises and Industrial Organization: The Case of India,
New Delhi: Sage
 Kumar, N. (1995) Industrialization, Liberalization and Two Way Flows of Foreign Direct
Investments: The Case of India, INTECH discussion Paper Series 9504
 Lall, S. (1980) Vertical Inter-firm Linkages In LDCs: An Empirical Study, Oxford Bulletin of
Economics and Statistics, 42, 203-226
 Lall, S. and Kumar, R (1981) Firm- Level Export Performance in an Inward Looking Economy:
The Indian Engineering Industry, World Development, 9, 453-463.
 Lall, S. (1983) Technological Change, Employment Generation and Multinationals: A Case
Study of a Foreign Firm and a Local Multinational In India (International Labor Office,
Geneva)

Websites:

1. http://commerce.nic.in/pr_archive.htm
2. https://www.imf.org/external/pubs/ft/bop/2006/06-09.pdf.
3. www.ficci.com
4. www.rbi.com
5. www.ministryofcommerce.com
6. www.itpo.nic.in