A Committee of Secretaries, headed by Cabinet Secretary K M Chandrasekhar, is studying a request from Air India for the government to provide a debt-and-equity package of around Rs 7,000 crore to help the airline tide over accumulated losses of Rs 5,000 crore.
Top sources involved in the talks, however, said the growing consensus in government is to halve that amount and release it in tranches linked to certain performance criteria.
To this end, the government will ask Air India to prepare an annual business plan and provide commitments on revenue generation, cost-saving targets, productivity and aircraft induction every month and quarter. Funds will be released only if these commitments are met, said sources.
"There are no free lunches," said a senior official involved in the financial restructuring.
The CoS will consult the finance ministry to work out details of the size of the financial package, including the debt-equity break-up, in the next few days.
The government might, however, provide an initial infusion of equity to help the airline repay dues to airport authorities and petroleum companies.
After the financial package is finalised the government may expand Air India's equity by asking financial institutions to subscribe.
The CoS had its first meeting on Saturday. Aviation Secretary M M Nambiar, Finance Secretary Ashok Chawla and Principal Secretary to the PM T K A Nair are the other members.
The committee was set up after Aviation Minister Praful Patel and Air India Chairman Arvind Jadhav made a presentation to Prime Minister Manmohan Singh on Air India's financial crisis.