CII and FICCI disagree on raising FDI in defence - Broadsword by Ajai Shukla - Strategy. Economics. Defence.

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Wednesday 11 June 2014

CII and FICCI disagree on raising FDI in defence

By Ajai Shukla
Business Standard, 12 Jun 14

Any decision to raise the foreign direct investment (FDI) cap of 26 per cent in defence production would be contentious. Sharp disagreement on the issue has surfaced between India’s biggest two industry bodies --- the Confederation of Indian Industry (CII), and the Federation of Indian Chambers of Commerce and Industry (FICCI).

CII, which includes manufacturing powerhouses like Bharat Forge, sees higher FDI as a catalyst for defence manufacture and job creation. On the other hand, FICCI, which includes innovation majors like Larsen & Toubro and Tata Power (Strategic Electronics Division), say higher FDI will not translate into greater indigenisation. Since defence technology developed by foreign original equipment manufacturers (OEMs) is controlled by their governments, FICCI says its transfer will be based on strategic considerations, not company ownership patterns.

On Tuesday, CII president, Ajay Shriram, welcomed the government’s proposal to raise the FDI limit. Lamenting that just $4.8 million of FDI had flowed into India since private firms were allowed into defence in 2001, Shriram said permitting foreign firms to own majority stakes in Indian defence companies would leverage India’s purchasing power, IT infrastructure and manufacturing potential to make the country a “key global manufacturing hub for defence systems and equipment.”

Earlier, in a 2012 report titled “Creating a Vibrant Domestic Defence Manufacturing Sector”, CII had projected that the defence and aerospace sector could create 10 lakh new jobs in the country. On Tuesday, CII said this would be accelerated by liberalising FDI.

The CII statement endorses “majority equity” for foreign OEMs without specifying an upper limit. The Department of Industrial Policy and Promotion (DIPP) has recently circulated for comments a proposal that mentions three possible levels of FDI --- 49, 74 and 100 per cent.

FICCI, in contrast, wants FDI capped at 49 per cent, subject to tight conditions. Writing to DIPP in 2012, FICCI said control must remain in Indian hands; the foreign OEM must brings in “key technologies as required in the priority list of the Ministry of Defence”; the foreign company’s home government must provide “in-principle permission to share technology with Indian partner”; Intellectual Property Rights (IPR) generated by the joint venture must reside in India, as well as other conditions.

FICCI officials reject the notion that raising FDI stimulates domestic manufacture. They point out that although 74 per cent FDI was allowed in telecom, which was raised to 100 per cent last year, India’s electronics import bill is on course to surpass the oil import bill by 2020.

In contrast, defence self-reliance is highest in the nuclear, space and ballistic missile fields, where international technology was comprehensively denied to India. In these three fields, government agencies partnered the private sector to develop indigenous technologies and systems.

Rahul Chaudhry, who was a member of the Vijay Kelkar Committee on defence indigenisation, and who heads a leading private sector defence company says, “The notion that higher FDI will increase indigenisation and create jobs ignores the fact that value lies not in build-to-print know-how, but in design, i.e. in “know-why”. The defence public sector in India has created many assembly lines for “Made in India” equipment. Yet we have never had control over the technology that goes into what these assembly lines build. What we need are “India Made” products, designed in India, with the IPR residing here.”

“If permitting 100% FDI for building products for the world largest cellular phone market has not spawned a single world-class Indian company that manufactures cellular handsets or infrastructure, how will it happen in defence?” asks Chaudhry.

Even so, the BJP seems poised to liberalise FDI in defence. Addressing parliament on June 9, President Pranab Mukherjee said, “We will introduce policies to strengthen technology transfer, including through liberalised FDI in defence production.”

In its election manifesto, released in May, the BJP promised it would “encourage private sector participation and investment, including FDI in selected defence industries.”

The current FDI cap was promulgated in 2001, when defence was opened up for the first time to the private sector. The DIPP’s Press Note No 4 of 2001 (paragraph iii) 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.”


  1. Sir fdi has nothing to do with indigenisation. Money is the only reason. Why are you leaving out that important point sir? If not for fdi who is going to give us money for our pending projects.

  2. I thought the sole purpose of Indeginization was to develop a home grown and stable supply of arms and ammunition that would ensure the armed forces had quality and quantity in time of conflict.

    So when India engages in Low Intesity Conflict in Azad Kashmir or Tibet or an expeditionary battle near Indian interests. Western and Eastern powers dont choke our vital supply lines in order to stop the fighting.

    I thought once that is achieved, India will position its arms industry as an exporter of weapons to Middle east or South east Asia and Africa. I dont include Europe and North America as they already have their own industries and defy all laws of economics when it pinches their industries. look at GM and Ford etc in automobiles.

    Once that is done many military products can be diversified and down graded to serve civilian needs. eg : helicopters for emergency services. IT systems for law enforcement, aviation for logistics, even drone/robots for luxury products.

    With FDI more than 49% in manufacturing are we not giving ownership of military manufacture in the hands of companies under foreign control ? Like the IT companies in India will 100% FDI in case of tech transfer to Indian firms necessarily mean that such technology will be available to the Indian State ?

  3. The key is to wind down the highly inefficient and corrupt state owned companies.Even with more domestic competition defense manufacturing, we should see a vast improvement. I agree with the sentiment that majority ownership does not translate into ToT. However, the telecom example is a stupid one. The money in telecoms is in service and not in cell phone manufacturing.

  4. I agree with FICCI that 100% FDI in defence is BAD for India.

    Arey, just think ! Simply because Nokia has plants in India, Vietnam and Mexico doesn't mean that these countries will get all the hi-tech secrets of making mobile phones. Far from it !!

    Last heard, a Chinese firm was setting up a plant in Rwanda. So, does that mean Rwanda will be the next cell-phone superpower ?

    In much the same way, the Boeings and Elbits will Not at all help India in a) getting any worthwhile tech, and b) making India "self-reliant".

    I hope those in favour of 100% FDI understand this crucial fact.

  5. @Abhiman - The press reports do clearly state that the FDI cap will be increased to a possible 49% in the event of TOT or partial TOT in Mid level technology products .

    A 100% FDI will only be available if there is FULL Transfer of Technology under High Level technology products.

  6. Need investment in R&D. This is where we need FDI???

  7. Col. Shukla, you said,

    In contrast, defence self-reliance is highest in the nuclear, space and ballistic missile fields, where international technology was comprehensively denied to India. In these three fields, government agencies partnered the private sector to develop indigenous technologies and systems.

    The above should be a preamble for our Defence Policy ! Very well put.

  8. @Abhiman...Will Nokia provide the hitech secrets when they are in partnership with an Indian company ???...Here atleast we are getting to do some work,creating jobs and saving forex.Nokia also has research centre in India (In Bangalore).We would not have got anything had we not allowed Nokia in. Marwadi Indian companies would be merrily making money.

  9. Opposition to the idea of 100% FDI by L&T and Tata Power SED stems from the fact :
    (a)that that they shall miss out on making profit from the Defence vertical. None of them have any engineering capability to make any cutting edge defence technology. Partnerships being the only route to profit sharing.
    (b)Look at their Defence R&D spends if any before listening to them. Investment means that the motive is profit at a later stage.They have invested in real estate for manufacturing but technology - nothing. Waiting for somebody or something to come?
    (c) Those who carp about "know-why" have no idea of even the present held systems 'know-why'. Did any body come in their way of their knowing when its their money and their will which decides matters in their companies.
    (d)The import substitute turns out to be much more expensive and inferior when produced by them. Sole purpose of making a fast buck very evident.
    2. 100% FDI does not mean that they cannot outbid foreign companies in getting the business. If they have the merit and capability to deliver at a lower price then the present Govt. is not coming in the way. Or else their statements sound like DRDO - like a kid whose lollipop has been snatched.

  10. @ Anonymous 11:25

    Anyone who says that L&T and Tata Power SED have no engineering expertise, or R&D spend is either:

    (a) Joking

    (b) Completely unaware of the reality; or

    (c) Putting out a motivated (but still scarcely believable) argument on behalf of someone.

  11. @ Rajiv Narayanan

    Most foreign company will not willingly transfer R&D to India in a manner that it becomes available to Indians. They have no problem using cheap Indian manpower for R&D, but ensure that the IPR remains with the company entity abroad.


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