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Indian Industry Divided on Foreign Investment Limits

Jun. 22, 2014 - 02:32PM   |  
By VIVEK RAGHUVANSHI   |   Comments
INDIA-KASHMIR-UNREST-POLITICS
Indian Defence Minister Arun Jaitley speaks to reporters June 15 after reviewing security preparedness along India's borders with Pakistan and China. The ministry has backed plans to increase the limit of foreign direct investment in defense programs, but industry is split on how high that limit should be. (Rouf Bhat / Getty Images)
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NEW DELHI — While India’s defense industry has welcomed the new government’s plan to increase foreign direct investment in defense deals, it is divided on how high that investment level should go.

The current level of allowed foreign direct investment (FDI) is 26 percent.

If the level went up to 100 percent, as some industry officials want, it would allow overseas firms to set up fully owned subsidiaries in India.

The Federation of Indian Chambers of Commerce and Industry (FICCI), a New Delhi-based defense lobbying agency, wants FDI to be raised to 100 percent only on exceptional basis and would want the ownership to be in the hands of the Indian partners only.

“FICCI recognizes the strategic nature of the defense sector and therefore advocates that adequate and mutual strategically beneficial safeguards be put in place while deciding higher levels of FDI in defense production,” a FICCI statement read.

“Allowing FDI even up to 100 percent should be allowed as exceptions, on a case-to-case basis, in cases such as aircraft engines, advanced missile guidance systems, seekers, production of smart materials, high-strength carbon fiber, etc., for which investments can be justified only by volumes available through integration with the global supply chain of the original equipment manufacturer.”

However, another domestic defense lobbying agency, the Confederation of Indian Industry (CII), has not specified any new limit, merely an increase.

“In order to attract investments in the defense sector, higher FDI cap, wherein the foreign investor has majority equity, will act as a catalyst,” a CII statement said. “Higher FDI will definitely help in creating a vibrant domestic defense industrial base in the country. We congratulate the government of India for initiating forward-looking policy measures.”

An executive with the private Indian company Larsen & Toubro, who did not want to be named, said there is no guarantee that only a 100 percent subsidiary of an overseas equipment manufacturer would transfer high technology.

Overseas defense companies are also divided on how high the limit should go.

“As previously advocated by BAE Systems, a move to abolish the cap on FDI in defense in India would be the most effective catalyst for rapid indigenization of capability as it would substantially increase the attractiveness of the Indian market as a place to transfer technology and develop know-how,” said John Brosman, managing director for India and Southeast Asia for BAE Systems.

“In addition to the potential economic benefits and job creation, the development of critical technology in-country would ensure India has ready and guaranteed access to the best available defense equipment and capabilities produced in India.”

However, Yves Guillaume, Airbus Group’s president for India, said there is no condition that original equipment manufacturers (OEMs) would only operate in India with 100 percent FDI.

“No OEM manufactures 100 percent of a product in-house,” Guillaume said. “If an OEM invests in a fully owned production facility in India, it would require an ecosystem of local tier-1, tier-2 and tier-3 suppliers. The OEM cannot depend on just imported components as that will render the project economically unviable. It will be in the OEM’s interest to encourage its existing suppliers to follow it to India and set up their own [joint ventures] locally. This is how the Indian industry benefits — by becoming a part of the supply chain to the local production facility.”

Merely increasing the FDI limit will not lead to a greater number of high-tech joint ventures here, said defense analyst Nitin Mehta. “The overall investment climate in the domestic defense industry must change to facilitate greater participation by the OEMs.”

Since 2001, when India’s domestic defense sector was opened to foreign investment through the FDI route, a meager US $4.8 million has come to India due to the 26 percent cap.

CII said it welcomes an increase in both FDI and defense exports.

“CII would also fully endorse the government’s initiatives of linking FDI with the exports from India,” the group’s statement said. “No business can be sustained for the long term just on the basis of domestic orders. There is an immediate need to revisit export policy.”

“The issue of joint ventures needs a business rather than a bureaucratic approach,” said defense analyst Venkataraman Mahalingam, a retired Indian Army brigadier general. “No country or businessmen would ever be willing to part with advanced technologies without the terms of business, including the fidelity and stability of the collaborative arrangements, being evenhanded, or if the foreign partner is deprived of some degree of control over the running of the industry.

“This would imply allowing increased stakes to the foreign investor, permitting easy repatriation of profits and adequate protection to intellectual property shared in such ventures,” he continued. “Providing opportunities to foreign manufacturers co-opted in such joint ventures to develop these facilities as a global manufacturing hub may be an answer and a win-win situation to both.”

The defense offsets market, estimated to be worth more than $10 billion, is one key area of the overall defense market in which joint ventures could be forged after the increase in FDI limit.

“We believe it is necessary to provide a policy framework in FDI and defense offsets that truly recognizes the contribution of investments and intellectual property to help international companies that have advanced technologies to ‘on-shore’ research and development and manufacturing in India. This needs to be accompanied with intellectual property protection so that these companies believe that their IP is protected,” said Sanjay Bhandari, chairman of private company Offset India Solutions.

While the domestic defense industry awaits a final decision on the FDI limit, which is expected to be announced next month, there is unanimity of view that merely increasing the limit of FDI will not speed major tie-ups. What is needed is a consistent policy, and accompanying climate to increase domestic weapons industry with the help of developed countries. ■

Email: vraghuvanshi@defensenews.com.

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