* Air India reviewing funding needs to remain competitive
* Government will continue to support carrier's financial needs
* Sale was key to government asset sales programme
* Air India's market share decline expected to continue - analyst (Adds comments from government officials)
By Aditi Shah
NEW DELHI, June 20, (Reuters) - India has shelved a plan to sell a 76 percent stake in state-owned carrier Air India due to lack of interest from bidders, a government official said on Wednesday, marking the latest setback in its ambitious efforts to rescue the ailing airline.
Air India is now reviewing its funding needs and weighing ways to remain competitive, Junior Civil Aviation Minister Jayant Sinha told reporters at a briefing, adding the government is still committed to privatising the airline.
The decision to pull the plug on the plan came after India last month failed to attract buyers for the government's stake in the debt-laden carrier, in a blow to Prime Minister Narendra Modi's credentials as a reformer willing to step away from running money-losing businesses.
"We ran a disinvestment process where we made it very clear what type of bid we were interested in receiving. Nobody expressed any interest ... that process right now is over so we have to move forward and consider other alternatives," he said.
The government will continue to support the loss-making airline's financial requirements while it works on alternatives, Sinha said, without giving a specific timeline for a new plan.
The sale was also key to Modi's plans to help keep the fiscal deficit at 3.3 percent of GDP, a goal already under pressure from giveaways to farmers and other welfare benefits ahead of the 2019 national elections.
While the government says it has been forced to review the plan also because of high oil prices, a weaker rupee and rising interest rates, potential bidders found some of the stake sale terms too onerous, making it a non-starter.
Delays could exacerbate the carrier's financial woes and hurt the government's efforts to cut debt, analysts said, adding the focus should now be on improving Air India's operations so it does not lose more money or market share.
"The government would look to improve the operational efficiency of the airline so that it becomes attractive for private investors to come in," said Teresa John, economist at Nirmal Bang Institutional Equities.
"I don't see the Air India stake sale happening before 2019 elections unless the scenario changes, especially with airlines already under pressure on rising cost," she said.
Air India, which employs some 27,000 staff, said this month it was seeking a short-term loan of 10 billion rupees ($148 million) so it can continue day-to-day operations.
The carrier had debt worth 487.81 million rupees ($7.16 billion) as of March 31, 2017.
Analysts say while a new plan is being worked on, the government should consider selling some of Air India's non-core assets to fund its working capital needs.
Air India has six subsidiaries – three of which are loss-making – with assets worth about $4.6 billion. It also has an estimated $1.24 billion worth of real estate, including two hotels.
The national carrier, operates domestic and international flights, runs a low-cost airline and also has a ground-handling business. Under the terms, bids were invited for all three.
"Air India is a classic case where the sum of parts is more valuable than the whole entity. Individual suitors are interested in different parts of Air India and they should go for a part sale," an industry source said.
The decision to suspend the sale is a highly disappointing reversal of the government's earlier commitment to privatising the national carrier, consultancy CAPA India said in a note.
"Under continued government ownership, with no clear roadmap, Air India is likely to see its domestic and international market shares decline over time to a point where the carrier is no longer relevant," it said.
Air India has been losing domestic market share to rapidly expanding lower-cost operators like InterGlobe Aviation Ltd's IndiGo and SpiceJet Ltd that are now looking to expand their international routes as well.
CAPA India estimated the carrier would make losses of $1.5 billion to $2 billion over the next two years alone, adding it represented an unnecessary drain on taxpayer funds.
"There will be need for incremental funds but it is not clear if that will come from the government or external borrowing from banks," said the industry source, adding that the airline would most likely have to take on more debt. ($1 = 68.1200 Indian rupees) (Additional reporting by Arunima Banerjee and Vishal Sridhar in Bengaluru and Jamie Freed in Singapore; Editing by Edwina Gibbs, Muralikumar Anantharaman and Alexandra Hudson)