The cabinet on Thursday approved a 174-million-dollar bailout for loss-making national carrier Air India as part of deal committing the airline to a major cost-cutting programme.
The civil aviation ministry said in a statement that the eight billion rupee (174 million dollar) equity infusion would be made in two phases.
"The company is currently struggling to address costly legacy assets, a weakening revenue stream and high-cost structure resulting in rising liabilities," the statement said.
The money would help ease the company's cash-flow difficulties and mean it will not have to turn to financial markets to borrow funds at expensive rates.
The state-run airline declared a $ 1.19 billion net loss for the year to March 2009 on account of the global economic downturn and reduced passenger traffic.
Under the terms of the cash lifeline, the airline will reduce its fleet from 146 to 105 aircraft by March 2011, replace older aircraft, and try to save 425 million dollars in costs for the current fiscal year that runs to March.
The airline would also redeploy staff and close overseas offices as part of a restructuring plan to be monitored by the government.
Air India has recently tried to lower costs by cutting loss-making routes and rationalising wages, but it has run into stiff resistance from pilot and staff labour organisations.
In October, Civil Aviation Minister Praful Patel said the government was looking to inject more than one billion dollars into the flagship carrier in phases on the condition it undertakes a broad turnaround programme.
The airline, which merged with state-run Indian Airlines in 2007, announced plans in September to cut performance-related pay by up to 50 percent for over 7,000 employees, including top management.
But the carrier was forced to delay implementation of the plan after senior pilots staged a five-day work stoppage in protest.