The Indian Government Thursday approved a fresh equity infusion of Rs 1,200 crore for ailing Air India in a bid to help ease cash flow into the state-owned airline.

The decision to pump in more funds was taken at a meeting of the Cabinet Committee on Economic Affairs(CCEA) chaired by Indian Prime Minister Manmohan Singh.

The airline, which is incurring a Rs 600 crore monthly loss, has so far received a total of Rs 1,700 crore this year and Rs 2,000 crore in the past two financial years.

As Air India is passing through critical financial crunch, the equity induction would not only ease the cash flow into the company but also preclude borrowings from markets at high costs, an official release said after the meeting.

A senior Air India official said that though the government's decision of fresh equity infusion of Rs 1,200 crore in the airline was welcome "this will not solve our problems".

"We have demanded Rs 6,600 crore from the government but we have so far got just Rs 500 crore. Also, most part of the new tranche of Rs 1,200 crore would go towards paying salaries to the employees and clear some dues," the official said.

"Actually, Air India needs a big dose of equity infusion and immediate approval of our financial restructuring plan," he added.

Air India is expected to post a loss of Rs 6,600 crore this fiscal.

Air India's present paid-up equity capital was not sufficient for an aviation company of its size which is already struggling to address costly legacy assets, a weakening revenue stream and high cost structure resulting in rising liabilities.

The cash-strapped national carrier has to pay salary and performance linked incentive (PLI) for the month of June and July, and PLI for the month of May to its pilots and other employees.

The Group of Ministers had, at its meeting held in February 2010, recommended rationalisation or harmonisation of the wage costs and "legacy" union agreements. It had also supported the setting up of support businesses of MRO, ground handling and cargo.

The GoM met last month and gave in-principle approval for infusion of Rs 1,200 crore equity and payment of due of Rs 532 crore to the airline for operating VVIP and evacuation flights.

Based on the approval of Cabinet Committee on Economic Affairs, the government has so far approved Rs 2,000 crore as equity investment in Air India during 2009-10 and 2010-11.

Besides, the government has approved and released Rs 500 crore as equity investment in the carrier during the current financial year.

"There are several factors which are causing losses to Air India... abnormal increase in aviation fuel prices, competition from budget and other airlines... increase in wages and overheads...," Indian Civil Aviation Minister Vayalar Ravi told the Rajya Sabha (upper house of Indian parliament) Thursday.

Besides, the government is paying interest on working capital and procurement of aircraft.

As a result, Air India is incurring Rs 600 crore loss every month as income is around Rs 1,100 crore and expenses at Rs 1,700 crore, the Minister said answering supplementaries.

Air India has taken a series of measures for reducing costs, which include rationalisation of certain loss-making routes, return of leased aircraft, phasing out of old fleet, reduction in contractual employment and outsourced agencies, fuel savings, optimisation of aircraft utilisation, closure of foreign stations and offline offices.

Indian Prime Minister Manmohan Singh had Wednesday said in Lok Sabha (lower house of Indian parliament) that wages and appropriate perks would be paid to the cash-starved Air India employees at the earliest.