The interests of the workers of Air India and Indian "would be taken care of" after the merger, said Federal Aviation Minister Praful Patel.
Officials said the deal would make the new entity more competitive, yielding annual savings of 5bn rupees ($113m).
Privately-owned rivals have taken market share from the duo.
Mr Patel said the merger of the two airlines would be completed "within two to three months".
"We wish to see a big, strong national carrier. This is our intention," he said.
The Indian government hopes that the combined firm will become one of the world's top 30 airlines.
The two airlines have a combined fleet of 122 planes and over 34,000 employees, including 1,315 pilots, according to one report.
Both the airlines have a 20% share of their respective markets in India and abroad and jointly carry over 12 million passengers.
Analysts say the merger will create one of the top airlines in the world in terms of the number of planes, but different corporate cultures and a diverse fleet may make things difficult.
Set up in 1932, Air India is the country's flagship airline, serving more than 40 destinations worldwide.
Air India has suffered as the country has opened up its skies
Indian, which began operations in 1953 as Indian Airlines, is focused on the domestic market and has a turnover or around $ 1.4 billion, according to the company.
Air travel has been growing rapidly in India as income levels rise and long-established players such as Air India and Indian have been challenged by more recent entrants.
Four budget airlines and at least two privately owned carriers have posed a stiff competition to the two state run airlines, with their profits under pressure.
BBCGüncelleme Tarihi: 20 Eylül 2018, 18:16