Posted by: John Elliott | August 16, 2010

Indian industry sensibly wants curbs on big FDI in defence manufacturing

India does not want a surge of foreign direct investment (FDI) in the country’s defence manufacturing industry. That long-held basic view has become clarified and reinforced during the past few weeks in three statements – one from A.K.Antony, the defence minister, and the other two from the country’s leading private sector industry federations, FICCI and the CII.

This is a good and sensible stance for India to take, despite intense pressure from the US, UK and other defence supplier countries for more FDI access. India’s private sector needs a chance to develop its own defence manufacturing capability before foreign investment rules are significantly relaxed.

The least interesting statement came from Antony, who has merely restated the government’s current policy of generally limiting FDI in joint ventures to 26% equity stakes. His remarks reflect the defence establishment’s wish to keep that figure unchanged, but he failed to mention that the government is currently reviewing the figure. This review follows the Ministry of Commerce’s industrial policy department (DIPP) publishing a discussion paper that suggested 74%-100% figures – with July 31 as a cut-off date for comments. The government is now examining the responses and a Group of Ministers (GoM) is expected to be appointed to reach a final decision on what to do.

Constructive ideas

The two industry federation comments are far more constructive than Antony’s because they stem not from the defence establishment’s wish to continue its old inefficient ways, but from the ambitions of private sector companies such as Larsen & Toubro (L&T), Tata, the Mahindra group, plus many medium sized and small firms, to develop their own defence manufacturing expertise.

Till recently, the Indian private sector was only allowed a peripheral role, but that is now changing and the companies deserve a chance to prove themselves.

The question is basically whether the limit should be kept at 26%, or raised to 49% which would increase foreign defence manufacturers’ exposure to India, or go above 50% so that the foreign firms could gain controlling interests.

There has been a tough debate in FICCI, and even more so in the CII where foreign companies started a rear-guard action towards the end of July, pushing for at least 49% and possibly above 50%. That sparked understandable protectionist sentiment and some suggestions that the 26% should maybe be lowered to 25.5% so that foreign companies could not have the statutory veto power gained at 26%

The basic argument for a high figure is that it would increase a foreign company’s commitment to India, bringing in large financial investments and transfer of high technology, as well as managerial expertise.

Doubts on technology transfer

FICCI, and to a more muted extent the CII, however has argued that “raising FDI is no guarantee for true transfer of technology”. This line is pushed by foreign companies such as Lockheed, BAE Systems, EADS and others that either have already set up a joint venture at 26% or are waiting to see how the policy develops.

However, Indian industry doubts whether high FDI levels would necessarily bring in top-level technology and fears that 49% would allow foreign companies’ to dominate joint venture boardrooms and change the management style and culture of the businesses

“The fact is that leveraging latest technologies from overseas suppliers would be difficult even if the FDI ceiling is raised as the OEMs [foreign companies] exercise no control over the release of technology which is exclusively under their governments’ control,” says Amit Mitra, FICCI secretary general. Consequently, he adds, “we are absolutely clear that FDI should not be more than 49 per cent”.

India has always been very lax in the way it has opened up FDI, usually responding to foreign and Indian vested interests and welcoming the financial inflows’ contribution to the country’s economy, but without really ensuring that foreign companies bring in useful top technology.

The new FICCI and CII policies sensibly address this. FICCI points out that countries like Germany, China, South Korea, and Canada have revised their FDI policies in defence “making the policies much more stringent [with] methodologies to punitively scrutinize FDI inflows in this sensitive and strategic sector”.

 “It must be kept in mind that [defence] FDI will be directed for the purposes of making [foreign] companies money, not for the development of private Indian firms or industry. The global players would not be too keen to encourage competition so the aim would be to drown out Indian companies,” says the CII.

There is also a view, held by ambitious Indian private sector companies, that many of India’s defence needs – especially in the army – do not involve the sort of top technology envisaged by proponents of high FDI limits. “Our technology needs are quite different from western countries,” says one defence executive. “Foreign soldiers grow up with computer games – here they come straight out of the villages. We are still in a post-second war situation in many areas and that won’t change in technology terms for 20 years so let’s not get into technology-yielding levels of FDI that we do not need”.

49% with restrictions

After their long debates, both FICCI and the CII acknowledge FDI could go up from 26% to 49% (but no higher) if various conditions are met – they include: the joint venture is Indian managed and produces full defence platforms (not just components) with a minimum capitalization of US$100m; the technology involved is needed by India and can be developed indigenously; the foreign company’s government approves the technology transfer in advance, without any risk of retrospective cancellation, and also sanction global sales from India; 50-70% of components and subsystems will be made in India and  exports will amount to ten times the equity investment within ten years.

This is good constructive stuff and should be seen by foreign critics for what it is – a genuine wish by India’s private sector to grow in the defence field. It is quite different from the protectionist public sector’s opposition to any policy change and, indeed, could help to generate improvements in the public sector.

So let’s hope that Antony and the rest of the government give the private sector the stimulus it wants and allow strictly conditional 49% FDI. The risk is that Antony will not want to do anything, and that will help no-one apart from India’s lazy public sector-dominated defence establishment and the foreign defence companies that supply India’s increasingly obsolete defence preparedness with as much as 85% (the official figure is 70%) of its current defence purchases.


Responses

  1. Yet another example of the Center having fallen asleep at the wheel. Even if we try to shift the blame to what are perceived as D.R.D.O dinosaurs surely at least some evaluative initiatives could be taken on dual use technologies or better benchmarked conventional weapons?

  2. Interesting that there was late pressure within CII, as they came out with a position some months ago.
    I doubt we will even see 49%: at least not until after the next round of state elections and even then……..GM


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