Defence industry, MoD hunker down for FDI battle - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Saturday 31 May 2014

Defence industry, MoD hunker down for FDI battle

By Ajai Shukla
Business Standard, 31st May 14

After the UPA tried unsuccessfully since 2010 to raise the 26 per cent cap on foreign direct investment (FDI) in defence production, a move that indigenous defence companies and former Defence Minister AK Antony resisted staunchly, the new government has initiated a fresh attempt along the same lines.

In 2010, the department of industrial policy and promotion (DIPP) --- at the behest of Commerce Minister Anand Sharma --- had pushed to raise the FDI cap to 74 per cent. This time, under Nirmala Sitharaman, the DIPP has mooted three separate options in a cabinet note --- proposing 49%, 74% or 100% FDI.

Commerce ministry sources say that, given the new government’s focus on promoting manufacture to generate employment, and with a new defence minister who is less protective of indigenous defence industry, the international defence industry’s longstanding demand to lower entry barriers into India might well be granted.

Even so, there will be stout resistance from the department of defence production (DDP), and from an indigenous defence industry that worries that the unfettered entry of international vendors would wipe out fledgling Indian defence companies.

“Please name one country that allows foreign defence companies unfettered access to the market. America theoretically allows 100 per cent FDI, but its laws mandate that every single employee must be a US national and the company must operate exclusively on US soil. India hasn’t the means to enforce such rules, and foreign companies will take full advantage,” says the CEO of a major Indian private sector defence company.

So watertight are the US laws that the Tel Aviv based president & CEO of, say Israeli company Elbit is required to take Washington’s permission before he can visit his own company facilities that operate in the US.

Furthermore, say defence industry CEOs, there is no evidence that increasing FDI provides any benefit to an industry. They cite the example of telecom, where permitting 100 per cent FDI has failed to galvanize the emergence of telecom manufacture. To this day, there is no significant Indian manufacturer of telecom equipment.

In 2001, the DIPP permitted private sector participation in the defence industry, vide Press Note No 4 of 2001, which notified several measures for liberalising the FDI regime of that period. Paragraph (iii) of that notification said, “The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26%, both subject to licensing.”

A 26 per cent holding allows the foreign partner only a veto over major policy decisions. Were the FDI cap raised to 49 per cent, the foreign company would still not control the company or the board, but would be able to repatriate a higher share of the profit. A significant FDI limit rise would be if foreign companies were permitted 51 per cent or above. And were 100 per cent FDI permitted, foreign entities would be able to buy out Indian companies in full.

Defence ministry officials and major Indian defence industries want to retain the 26 per cent cap, since it allows the Indian partner to demand technology infusion from the foreign original equipment manufacturer (OEM).

Indian industry sources point out that, while India proposes to raise FDI caps, Germany has recently reduced its defence FDI cap from 26 per cent to 25 per cent in order to further curtail the rights and powers of the foreign partner.

Citing an agreement signed this week between Samsung, and Larsen & Toubro (L&T), officials say the Korean defence major would have probably chosen to go it alone, had 100 per cent FDI been allowed.

“Since L&T is the controlling partner, it will ensure that Samsung brings in the technology, which will be translated by low-cost Indian workers into cheaply priced defence equipment. That is the model to follow,” says the official who requested not to be named.

Foreign OEMs deny this, arguing that they would be ready to bring in high-end technology, and to source Indian-built defence equipment for their global supply chains, if only they had more control over the joint venture company.

Indian CEOs counter this with the question: Can you name one foreign OEM that has willingly transferred technology to India? They point out that 72 multinational corporations employ two lakh Indian engineers in research and development (R&D) centres in places like Bangalore, Hyderabad and Pune. Yet none of the technology that they have developed is available to India.

The question at the heart of the FDI dilemma is: Should the government regard the defence industry as just another avenue for creating manufacturing jobs? Or should the government nurture a defence industry as a national strategic objective. A government focused on job creation might not be inclined to treat defence as a special sphere.


  1. We hv tried 26% for 10 years. Nothing concrete/revolutionary happened in indian defence industry. Lets try 100% in high end technology side. If the indian industry cant compete at par with its foreign vendors then so be it. They dont deserve. Even now they have not contributed in any significant way after opening up. On the other side what if foreign companies bring in high end technology to India since they have full control ? Would it not benefit india ? Is it not worth experimenting ?

  2. the problem with india is that people who are unqualified head the ministries.the latest example is that of our new HRD minister who is not even a graduate.
    these people are arrogant who eventually end up implementing things which has only cosmetic value and are populist measures.100% fdi in defence is one more example which might end up creating jobs in the short run but in the long run it would end up making india disabled and crippled.the focus should be towards encouraging entrepreneurship in general,preventing brain drain,giving right environment to the science graduates to do further studies rather than do management and eventually encouraging innovation and creativity.the combination of entrepreneurship which brings with it risk taking and the desire to innovate rather than depend on foreign technology is the only way to move is the only way which can make india self reliant and self sufficient and a superpower in its true sense.opening up the indian defence sector will be a turning point for india which could change its trajectory forever.

  3. There is always an opposition to new policies and laws, that does not make the proposed changes wrong or unhelpful. Allowing 100 FDI in telecom and pharma has not hindered local telecom and pharma giants like Bharti and Dr. Reddy to be successful.
    100% FDI does not automatically result in acquisition of the local entity by foreign company. However, it definitely opens up the possibility of more investment in the defense infrastructure. Yes telecom giants may not have brought in source codes of their software but have invested billions in the telecom infrastructure. In the same token, defense industry will benefit from serious competition and useless DPSU will hopefully be privatized.
    Before criticizing new policy, one should look at the effects of existing policy - almost all defense hardware is 100% imported or assembled at DPSU at exorbitant cost. Why not criticize that instead?

  4. The question is not about creation of jobs. It is a question of choosing between being the world's #1 importer (being perpetually dependent on the supplier) and allowing arms manufacturing in India, saving on forex and exercise a great deal of control over the supply and maintainance of arms bought.

  5. we could allow 49 percentage fdi with stringent laws for the foreign companies. Allowing more than 49 percentage will be problematic.

  6. soldiers,pilots will also come from FDI,

    100% FDi in retail,
    100% FDi in railways
    100% FDi in defense

    whats does all this nonsense.

  7. Completely contrasting viewpoints, difficult to decide BUt.....after 55+ years and still stuck with DMS boot, no water bottle for new ICK and same green forest combat dress frm mountains to desert, why not give 100% fdi a chancr...helll let 100% employees be American...give me a waterbottle bettter than a soda bottle...

  8. @"major Indian defence industries want to retain the 26 per cent cap, since it allows the Indian partner to demand technology infusion "...Indian companies want all the profit themselves without investing or being responsible for R&D.Indian companies are just not capable of doing the R&D that major international defence companies do. If google, microsoft and other companies can have their R&D centres in India, why can't internatonal defence companies ???R&D in defence should also mean Indians doing R&D in defence (irrespective of the company they work for) and not just 'Indian companies' doing R&D in defence.Indian companies are only interested in making profits while disregarding the overall benefit that foreign investment can bring.

  9. The FDI cap must be kept at 26%. Otherwise, the indigenous defense industry will be irreparably harmed.

  10. I like the rule put in by the American government w.r.t defense FDI, that all employees must be Americans and that the manufacturing must be in America. We can follow this model. But let's not forget, countries like Turkey have done better then India in defense research and offset. There went for joint development with Americans, Koreans and Isreali. Today, their Aselsan and Rocketsan are some of the best defence contractors in the third world. The Financial Times of London has vouched for this. The line of products displayed by them in every defense show rival developed countries'.

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