ANALYSIS - Ailing national carrier Air India may test India's reform zeal

By Matthias Williams

NEW DELHI (Reuters) - Prime Minister Manmohan Singh has been confronted by a high-profile challenge less than two months into his second term -- how to fix the ailing national airline carrier, which has asked the government for a bailout.

The government has given Air India, which suffered $875 million in losses in the fiscal year ending March, a month to submit a plan to restructure and cut costs.

Aviation Minister Praful Patel said last week the Congress-led government is "fully committed" to the airline but urged Air India to "rise to the occasion".

But if the carrier does not, in Patel's words, "shape up", the government faces a choice whether to infuse cash without real changes in the running of the airline, attempting a partial privatisation through an IPO, or letting the airline founder.

Air India's plight could indicate how far Singh will reform India's state companies often seen as dragging economic growth, or whether he will side with protecting jobs and votes.

Founded before India won independence from Britain, Air India was long a source of pride. But experts say the airline has been mismanaged for years and delivers a shoddy product.

Letting the airline fend for itself and lose many of its 31,500 employees would be risky for the Congress-led government, though it won a convincing general election victory in May.

Air India may also give a wider signal to how far Singh, with his strong mandate to push Congress' agenda of inclusive growth, will dare to introduce market reforms and help India climb back to the 9 percent annual growth before the financial crisis bit.