India is a veritable catalog of airline industry woes. Persistent operating losses, strikes, grounded airplanes, inadequate air and surface infrastructure, high-cost fuel, multiple taxation issues—all have been the bane of the country’s aviation sector.

While India is the ninth-largest national airline market in the world, it ought to be much larger, and both industry executives and aviation officials know it.

“Aviation [is] a vital tool that could be used to fuel economic growth,” a Civil Aviation Ministry official acknowledges. He says the ministry is seeking to increase outlays in the federal budget to develop the aviation infrastructure in smaller cities and stabilize the debt-ridden national carrier, Air India.

It is one sign that India is making a concerted effort to remove at least some of the obstacles to growth of its airline industry. Estimates suggest that domestic traffic in India will reach 160-180 million passengers annually in the next 10 years and international traffic will exceed 80 million passengers per year, up from the current 60 million domestic and 40 million international passengers.

According to the International Air Transport Association’s (IATA) forecast for 2012-16, India’s domestic air travel market should be among the top five globally, experiencing the second-highest growth rate over that period. But it will not happen automatically.

“Building the future for a successful aviation sector must begin with solving the well-cataloged problems of airlines in India today,” says Tony Tyler, director general and CEO of IATA.

“The sector is growing, but not profitably. Airline losses approached $2 billion in the year ended March 2012, after losing $3.5 billion over the previous three years,” Tyler says. “With some relief in oil prices and capacity rationalization, the red ink may recede slightly. But the crisis continues. All the network carriers are struggling financially.” State-run Air India is on life support and private carrier Kingfisher Airlines is on the brink of death.

A lot has changed in the past decade, mainly with the rise of low-cost carriers (LCC). From almost nothing in 2003-04, the domestic market share of LCCs, including the low-cost arms of full-service carriers, today exceeds 70%. And the LCCs believe they have just begun to develop a huge potential market.

But first, there is need for airports that will complement the no-frills model. As one airline official says, “There is great scope for a new dimension for India civil aviation in connecting to Tier 2 and Tier 3 cities [because of] rapid urbanization of the country and the emergence of several smaller towns as industry and business centers.”