The national airline, which has been surviving on taxpayers' money, is scheduled to get $1.3 billion in fresh equity from the government in the current fiscal year but this is linked to its performance.

"Pilots need to understand that if Air India does not meet the performance yardsticks set in the plan, that money will not reach them. It's not a one-time deal," minister Ajit Singh told Reuters in an interview.

India's civil aviation industry is suffering under high fuel costs, low fares and a combined debt of $20 billion. Five of the country's six main carriers are losing money.

Cash-strapped Air India was forced to cancel at least 30 flights on Thursday alone, after more than 150 pilots did not report to work, demanding exclusive rights to fly new Boeing (BA.N) Dreamliners.

"The government is not going to keep on pouring money into Air India anymore," the minister said. "Nobody is indispensable."

The carrier has sacked three dozen pilots since the "calling in sick" agitation began on Sunday night and a court has declared the action illegal.

"Air India is in a very bad financial situation. They are not able to pay their employees, they have not cleared airport dues," Singh said, adding that it owed billions of rupees to fuel suppliers.

About 500 Air India pilots who fly international routes have been demanding their colleagues from former state-owned partner Indian Airlines should not be trained to fly Dreamliners, as it may hurt the career prospects of original Air India staff.

The two companies were merged in 2007 but there have been problems with integration. Air India's purchase of Dreamliners was also criticised by a federal auditor last year for "imposing an undue long-term financial burden".

The government would not bow to the pilots' demand, Singh said.

"If a lot of pilots keep reporting sick ... it will cause disruption. But the prospect of disruption is not going to stop us from taking firm action," he said.

Singh said the government was open to private investment in the Air India, which has nearly a fifth of the domestic market, but it would take this up on a case-by-case basis.

"There are a lot of people trying to enter this market," the minister said. "Air India has lots of assets, and I am not talking about only monetary assets. They have the routes, they have the pilots, they have the parking spots."

(Editing by Ranjit Gangadharan and Mark Potter)

• A Permanent Economic Emergency