India will allow domestic commercial airlines to fly long haul international routes, a move it hopes will stoke competition and drive down prices.
The skies above India are going to get more and more crowded
However, only state controlled carriers will be able to fly the lucrative Gulf routes, to countries such as Kuwait and Saudi Arabia, for at least three years.
Jet Airways and Air Sahara are the two companies that will benefit initially.
India is looking to develop its airline industry as booming economic growth drives demand for travel.
Monica Chadha, BBC Delhi reporter, said air travel in India had increased by almost 20% from the previous year and was expected to rise even further.
Infrastructure development is lagging demand, however, and will have to improve.
"Most international airports in the country are shabby and ill-equipped to handle heavy air traffic," Ms Chada said, adding that while the Civil Aviation minister has promised to modernise and privatise airports little progress has been made.
Steps have been take to move things forward and the government recently changed legislation that limited foreign investment in domestic airlines.
It raised the maximum stake holding allowed to 49% from 40%.
Local press, meanwhile, have reported that the US and India will start negotiations about adding more routes in January.
Jet Airways is India's premier private domestic carrier; Air Sahara is ranked third in the category.