Right now, the majority of aviation development in India is like the tango; two steps forward, one back, stop and gaze at your partner, wait for applause, then repeat.

“Aviation in this country has a lot of catching up to do. It needs firm government intervention,” says Ravi S. Menon, executive director at AirWorks, reflecting widespread belief in the sector. Although he is referring generically to the world of MRO and airports, the message equally applies to the Indian aviation industry as a whole. But given India's recent track record of government intervention, merely becoming involved is not going to be the solution. Fundamental change in how to be involved is needed.

There is no doubt that India offers a massive and potentially rewarding market to those that do succeed in aviation. Sheer weight of numbers proves the point; according to the consulting firm McKinsey, India's newly wealthy middle class will reach the 250 million mark by 2015. That is a lot of people with disposable income. But accessing them and making a profit can indeed be tricky.

Applying consistent and realistic airport taxes (airlines flying into New Delhi were hit by a one-off 346% rise last year), as well as a rationalization of taxes, are essential for the industry to grow. Currently airports may choose whether to levy a departing User Development Fee (UDF), an Airport Development Fee (ADF) and occasionally an incoming passenger UDF.

That these vary across airports, and are sanctioned by an independent body—the Airport Economic Regulatory Authority of India—is a barrier to business planning.

Fuel taxes face the same loosey–goosey standards. Although some states such as Jharkhand, Chhattisgarh, West Bengal, Rajasthan and Madhya Pradesh have reduced taxes on jet fuel, other more heavily flown states levy up to 30%—with an additional 8% government excise duty. This is a regulatory hodgepodge that hinders route expansion and forward planning, and is up to 15% higher than the global average.

The solution would appear, to outsiders, to be found in these straightforward factors: Establishing a single, homogenous regulatory system that controls airports and is dovetailed into a clear government-led policy and a single homogenous tax regime that charges a set 4-5% fuel tax on all operators—again, headed by the federal government, not rent-seeking state governments. The confusion over taxes and airport charges extends to regulatory decisions as well.

Following Star Alliance's decision to welcome Air India back into the grouping later this year, with the attendant extra potential business that membership would bring, the promised benefits of this move were distorted before they could even begin to go into effect.

On Jan. 31, the FAA announced it was downgrading India to a Category 2 safety ranking from Cat. 1. Indian Civil Aviation Minister Ajit Singh declared the decision to be “very disappointing and surprising.”

The ruling meant that new routes and code shares between Indian and U.S. carriers would be frozen, immediately affecting not just Air India but other local carriers with an eye on the U.S. market—such as Jet Airways. Given that both have invested in significant twin-aisle aircraft orders, this was bad news for their route-expansion plans. The FAA's beef was that although the newly invigorated and expanded Air India (and Jet later this year) are taking delivery of the very latest technology in the form of Boeing 787s, the ability of the Indian Directorate General of Civil Aviation (DGCA) to adequately ensure full aircraft inspection on the new and more sophisticated airframes was still in question.

The DGCA responded immediately by saying it was adding approximately 75 new aviation safety inspectors. The news was welcomed by the industry—but raised questions as to why this was done only on a reactive basis under the shadow of the category downgrade. Also, it is not clear where these new inspectors will come from. People within the industry are wondering whether the move will mean recruiting a trained staff from outside the country.

In an FAA statement, the U.S. safety agency hinted that it may have to help out. “U.S. and Indian aviation officials [will continue to] work to meet the challenges of ensuring international aviation safety,” says FAA Administrator Michael Huerta, adding that the U.S. “looks forward to continued progress by Indian authorities to comply with internationally mandated aviation safety oversight standards.”

This lack of official buy-in to the solid pace of private industry development has been named by officials and industry players alike as an important element in the unsteady pace of industry growth.

Despite dramatic passenger growth—some research indicates as much as a 40 million increase in passengers in 2011 alone—India has a relatively poor record of health for its airlines. Kingfisher is grounded, Jet has been rescued by a 24% stake from Emirates, and Air India losses are expected to be around $620 million for 2013-14.

One of the few beacons of hope is IndiGo, with approximately $127 million in profits in 2013. Although some of this can be attributed to smart leaseback agreements, it seems as though the airline's lack of committee-culture decision-making (IndiGo is unlisted) and the provision of paid-for yet slightly better-than-average low-cost carrier (LCC) facilities such as seat allocation and dedicated lounges has helped. In addition it has taken advantage of the recent Ministry of Civil Aviation (MCA) decision to allow unbundling services.

But the majority of operators are still complaining. On top of the fact that both high (and variable) airport and fuel taxes took their toll on operators, the carriers have poor airports and a heavy paperwork load to bear compared with many other jurisdictions. This is borne out by comments from the International Air Transport Association (IATA) head, Tony Tyler, who noted at the recent Singapore Airshow that: “Taxes are not the only issue. The availability of efficient infrastructure is equally important . . . in India it remains a problem.”

Menon adds that much of the hindrance stems from “bureaucratic processes bringing unnecessary delays. And this is not helped by a lack of a definite and consistently applied civil aviation policy.”

Indeed, this staccato policy process has been well illustrated by bureaucratic wavering over the decision to allow Airbus A380s to fly into Indian airports. Although several airports had spent significant amounts ($8 billion for Mumbai's Terminal 2 alone) to make them fully capable of handling the A380—both on the runway and airside—since the idea was first mooted in 2008, the MCA had consistently showed reluctance to grant the aircraft access.

The A380 ban, say unofficial reports, was due to the perception of threat the mass-transport aircraft would bring. International carriers such as Lufthansa, Emirates and Singapore Airlines—all of which already owned A380s—were cited as keen to add A380 flights six years ago, but were denied permission to open Indian routes.

This populist protectionism on the part of the government toward local carriers is driven by two issues. In this, the government and aviation authorities are seen as keeping one eye on business development and taxed income and the other eye on the nationalistic voter.

Now the ban has been lifted and at least two carriers (Emirates and Lufthansa) have signaled they will initiate services by the end of the year. But bureaucracy may still intrude on a smooth introduction. Existing bilateral air services agreements that India requires for aircraft to land will need to be reapproved before A380 services can start.

Additionally, airports capable of handling the mega-transports still have to be certified for A380 operation by the DGCA. As a result, although all the signals are green, Lufthansa will likely introduce A380 operations to India only on a hazy “winter schedule of 2014-15,” noted CEO Christoph Franz in a recent interview.

Not all the news from India is of the one-step-back, two-steps-forward variety, however. Several carriers are eyeing the market with a glint—including established and proven players such as Singapore Airlines and AirAsia.

Both are committed to ventures in India, each with jointly operated new startups with Indian conglomerate Tata. Each airline states that the advantages of the market outweigh the downsides—despite having been burned in the past. “We know the challenges in India are real, but think a full service airline can work,” says Mak Swee Wah, Singapore Airlines (SIA) executive vice president, commercial. “We see [it] as an additional platform for growth of our business.”

Despite Mak's confident stance, this will be SIA's second recent attempt at an Indian joint venture. The last Tata-SIA attempt to buy into 40% of the ailing Air India in 2001 was rapidly shot down by internal political wrangling over ownership and control, leaving SIA sitting bruised on the sidelines.

The Singapore-based carrier's new attempt will benefit from the removal of several of the previous hurdles, says Mak, citing more open foreign direct investment regulations, a new and more positive government approach and the growing potential market.

“There are still hurdles like running [fuel] costs and other regulatory issues, but we are looking at getting off the ground in late 2014,” he confirms. The new yet-to-be-named-joint venture carrier will see Tata Sons with 51% and Singapore Airlines with 49% ownership stakes. Caution is still a watchword though: All of the carrier's initial 20 A320s are being leased, not purchased.

AirAsia, also putting its toe into the sub-continental water for a second try, is taking 49% in fledgling Air Asia India, along with Telestra Tradeplace (21%), and again Tata (30%). AirAsia cut its services to India back in January 2012, flagging “structural issues in the Indian aviation market [that] made it difficult to operate economically viable flights” as the reason to pull its highly marketed AirAsia X routes. Many of those problems are still evident. In fact, high taxes and airport charges have been suggested as the reason for Air Asia India using Chennai as a hub instead of the higher-profile New Delhi or Mumbai airports.

According to a former executive of Peach Air, the situation has not changed much. The Japan-based LCC looked at the possibility of starting flights to India, but was put off by what he described as a “potential nightmare” of regulation, poor infrastructure and fuel tax uncertainties. “It simply would not have been worth it,” he says. “The market is there, but making [another foreign LCC] work would be incredibly difficult.”

Without doubt, IATA chief and AirAsia CEO Tony Fernandes will have more on his hands than just structural and cost-based factors. Nonetheless, he radiates confidence. “We have to allow the common man to fly,” he said in a recent interview. “My message to the Indian government and the state governments is that flying is not only for the rich.”

Fernandes takes the view that flying is a “great economic driver” and to drive more business, the best way is to reduce costs. The thing that should absolutely not be done is to treat airlines as “cash cows” for state governments and airports to milk.