kingfisher Airlines
kingfisher Airlines Reuters

The cabinet will consider a proposal on Friday to allow foreign airlines to buy stakes in local carriers, moving forward with a much-delayed reform that could revitalise debt-ridden domestic carriers.

Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent. If the proposal is approved, foreign airlines would be allowed to buy similar-sized shareholdings.

"This is a good policy move. Markets are waiting for some policy action on three fronts: diesel hike, FDI in aviation and retail," said Hitash Dang, vice president at Jaypee Capital.

Indian carriers are laden with $20 billion in debt and probably lost $2.5 billion in the fiscal year that ended in March, according to Centre for Asia Pacific Aviation, a consultancy.

Domestic carriers, led by struggling Kingfisher Airlines, have long lobbied for the move, which they hope would provide much-needed funds to keep them afloat.

The proposal has been languishing for years because of a lack of political consensus. The decision by the cabinet to discuss it on Friday, therefore, is a significant step forward, although there is no guarantee the measure will be approved.

"We are really hopeful of FDI in the industry. If it comes, we will welcome it," said a spokeswoman for SpiceJet. "But a lot of talk about FDI has been going on recently. We will wait and see until after the meeting."

Prime Minister Manmohan Singh's government has been under fire for failing to push any notable economic reforms since its re-election in 2009. The proposal, if approved, could pave the way for more politically challenging reforms such as allowing foreign supermarkets to invest in India and carrying out a long-overdue fuel price increase.

Trade Minister Anand Sharma said the retail reform was not on the cabinet's agenda on Friday.