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Govt Allows 49% FDI In Aviation Sector

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India allowed foreign airlines to buy stakes of up to 49 per cent in local carriers in a long-awaited policy move, providing a potential lifeline to the country's debt-laden airlines by opening up a fresh source of funding.

The decision taken on 14 September, coming on the back of a controversial diesel price hike on 13 September, is likely to intensify conflict within the ruling Congress party coalition, with its own allies previously blocking such a move.

"This is a very positive step," said Amber Dubey, head of aviation at KPMG India, a consultancy. "I don't expect a flurry immediately... but there will be interest. A lot of people have been watching."

Newly affluent Indians, with increasing disposable incomes, have already started treating flying as a mode of transport rather than a luxury, providing a massive local market.

However, any global carrier eyeing a stake in an Indian carrier must weigh up the benefits of a market with high long-term growth potential but one that has been squeezed by high costs and fierce price competition.

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Praful Patel, India's heavy industries minister, told reporters that foreign carriers would be allowed to take a stake of up to 49 per cent in local airlines. Previously investment by foreign airlines was not allowed.

The 49 per cent limit includes both foreign direct investment and foreign institutional investment, according to a government document seen by Reuters.

Ailing Kingfisher Airlines, which was India's No. 2 local carrier a year ago but has since grounded most of its fleet, has lobbied hard for this move in hopes that it can attract a foreign airline investor, although none has publicly expressed interest.

Budget carrier SpiceJet, the fourth-largest of India's six main airlines, said on 14 September it was in initial talks with several Gulf carriers and was waiting for the government to ease rules before it takes a final call.

With global airlines buffeted by the European debt crisis and high fuel costs, cash-rich and fast-growing Gulf carriers such as Dubai's Emirates, Qatar Airways and Abu Dhabi's Etihad are seen as the most likely buyers of stakes in Indian carriers, analysts say.

Boeing Co<BA.N> raised its forecast for the Indian plane market on Tuesday, saying the South Asian country would need 1,450 new aircraft worth $175 billion by 2031.