Higher Defence FDI Cap On Agenda

Monday, April 02, 2012

http://www.defencenews.in/defence-news-internal.asp?get=new&id=1120

The government is once again exploring the possibility of raising the cap on foreign direct investment in defence to 49% from 26%, in the face of hectic lobbying by Indian and foreign companies.

According to top officials, while orders are increasing in size, foreign contractors are finding it difficult to purchase components or invest in low-tech production facilities to fulfil their offset obligations.

On the other hand, they are unwilling to bring in their patented technology, unless they have a greater say in their Indian joint ventures.

Foreign manufacturers such as Boeing, Saab, EADS do not wish to bring their proprietary technology for high-tech weapons or spares into a joint venture in India unless they have a larger say in running the venture. They complain that at 26% stake levels they have virtually no control over the venture.

Under the offset policy, foreign firms selling weapons and aircraft have to compensate India by buying at least 30% of the value of goods sold.

These entities can either directly purchase components and services from state-run and private defence firms in India or invest in the domestic defence industry and defence research.

Over the next few years, the market for defence equipment is expected to be around $100bn.

This year, the country will spend around $14 billion on capital purchases and modernisation. An order for jet fighters, to be placed with France's Rafael later this year, will be worth $12 billion.

The size of the defence orders, which makes India the world's largest buyer of arms, is attracting big foreign companies. However, the 30% offset clause is proving to be a major hurdle.

The last two years saw high-profile pitches for an increase in the FDI limit by officials accompanying US President Barack Obama and British Prime Minister David Cameron.

Ideally, foreign investors would prefer raising the FDI bar to 100% or atleast 51%. However, domestic players such as the Tatas, Mahindras and L&T are not in favour of expanding the FDI limit to 51% as it will stymie their own plans.

The BAE–Mahindra & Mahindra joint venture is involved in making defence vehicles and guns.

The EADS-L&T tie-up is into defence equipment. Besides a joint venture with Lockheed Martin, the Tatas have a tie-up with Sikorsky for helicopters.

India needs to use it's huge purchasing power to gain access to high-end technologies which have dual use. Now that the US has also relaxed it's rules for transfer of dual-use technology, India should take advantage.

Chinese Policy ::

Unlike the Chinese, India is yet to develop capabilities in reverse engineering.

Even 15 years ago, Chinese weapons were inferior to American and European equipment and Beijing was a major importer, much like India now.

However, the communist regime worked consciously to bridge the gap — it indulged in reverse engineering by taking weapons such as British missiles apart, understanding their workings and then producing them indigenously.

Beijing also worked on Soviet era fighter jets and brought about improvements in them.

India is yet to fully realise the domestic potential for manufacturing high-tech weapons and has to piggyback on joint ventures with foreign arms majors.