Monday, 12 April 2010

MoD will block 100% FDI in defence

by Ajai Shukla
Business Standard, 12th Apr 10

The Ministry of Defence (MoD) plans to oppose the Ministry of Commerce and Industry (MoCI) proposal to allow foreign defence corporations to establish fully owned defence units in India. The MoD apprehends that raising the FDI cap significantly would seriously damage India’s nascent defence industry, particularly the 8 MoD-owned defence public sector undertakings (DPSUs).

“The Commerce Ministry cannot raise the FDI cap without first consulting us, and we will definitely not allow 100% FDI anytime soon”, a senior MoD official told Business Standard on condition of anonymity. “We have already rejected two applications for setting up Joint Venture companies with 49% FDI. Where is the question of allowing 100% FDI?”

The first application the MoD rejected was that of a proposed JV involving Mahindra Defence Systems (74%) and UK-based BAE Systems (26%); the second rejection involved L&T (74%) and Franco-German corporation, EADS (26%).

The new Consolidated FDI Policy, effective from 1st Apr 10, enunciates the current FDI limit of 26%. But the MoCI’s Department of Industrial Policy & Promotion (DIPP) is lobbying actively for raising this limit.

The DIPP Secretary, RP Singh, explained the MoCI’s rationale to Business Standard on Saturday. “We are very focused on the defence sector. As an industry department we realise that if the defence sector is opened to FDI, its impact upon the manufacturing sector in India will be very great. Foreign defence majors will be more likely to bring in sensitive technology if you allow them higher FDI. Defence production requires technology, and also huge capital investments. If we can address security concerns, there is a chance of opening it up to 100%.”

Mr Singh revealed that the DIPP had already sent a written proposal to the MoD after preliminary discussions. The DIPP letter proposes greater foreign equity in defence JVs, but does not suggest a specific FDI level.

“Things are still at a discussion stage. Our stance will get crystallised after we discuss and only then will the Government of India change the policy”, pointed out the DIPP Secretary. “My personal view is that 100% FDI should be allowed; but all stakeholders will contribute to the final decision.”

The MoCI claims that Indian private defence manufacturers, such as L&T and the Tata Group, support the raising of FDI caps in order to allow a larger share to foreign companies. But Business Standard has learned that R&D-oriented private sector companies are apprehensive that global majors will use their Indian subsidiaries to get the MoD to fund the development of weapons systems under the “Make” category of the Defence Procurement Policy of 2008 (DPP-2008).

The DPP-2008 allows any Indian company --- and a 100% Indian subsidiary of a global major would be eligible for this --- to receive funding from the MoD for developing defence platforms under the “Make” category. The MoD has undertaken to fund up to 80% of the development cost, with the private vendor paying just 20% of the development cost.

“With defence budgets coming under severe pressure in the west, what better way of obtaining funding than setting up a 100% subsidiary in India that can draw from the Indian MoD”, asks the CEO of a prominent private sector defence company. “It would be entirely legitimate, and it would wipe out the Indian defence manufacturers entirely”.

For smaller, less R&D-oriented Indian defence manufacturers, however, a raise in FDI caps would come as a blessing. This would allow them to benefit from borrowed technology and also reduce capital costs in setting up new manufacturing units.

The MoD’s opposition, however, to increasing FDI caps stems from the fear that the entry of large private manufacturers will lead to job losses with DPSUs and Ordnance Factories. The DIPP counters that foreign vendors are likely to partner the defence public sector in setting up manufacture.

Speaking to a CII gathering on 1st April, the DIPP Secretary said, “If full investment comes here, [the foreign vendors] are not going to manufacture everything themselves. Lot of it will be outsourced from the Ordnance Factories. The kind of infrastructure that they have got… they have the best CNC machines; huge land; a good work force; only thing is that they are not in a position to source technologies from outside.”

Since 2001, when the private sector was allowed into defence manufacture, there has been a cap of 26% on Foreign Direct Investment (FDI) in defence. The government’s Economic Survey for 2008-09 had flagged the possibility of raising this to 49%. The US government and industry bodies like the US-India Business Council (USIBC) have also lobbied for raising the cap to at least 49%.

11 comments:

Anonymous said...

Here is what a prominent pvt sector gent told a group of us journos in January 2009:

"He said he was aware of several campaigns made by interested parties to kill the offsets proposals and also the 26% FDI cap. While ostensibly different, both relate to the fact that global manufacturers from the west cannot take advantage of the rich cake that is the indian defence budgets capital expenditure section, to the maximum degree. There are also concerns that the indians will get access to technology they dont "deserve" and bypass intentionally restrictive trade/technology embargos put on sensitive military related systems via forcing partnerships with local industry (both 100% FDI and offsets relate to these)."

As such the decision by MOD to reject the 100% FDI cap is good. The DIPP proposal should be explored as to who exactly floated this idea to them.

Daanish said...

There exists a paradox in the mindset of India, we strive to build our own defense industries but the lack or research capital has hampered their ability to make good things quickly. On the flip side we need to import a lot of weapons to keep our force levels normal. The kicker is that the people who are always hooting for 100% private sector also want to drop the fdi cap.
Not realizing or naively omitting the fact that foreign companies will obliterate our defence sector with sheer volume and quick deliveries. Best path is the middle path, pump money and serious money into local R&D and universities , keep the dpsu's going. While keeping up our foreign project commitments.

As a parting shot any opening for the private sector to the defence industry should be kept desi.

Maratha Mind said...

I actually agree for the first time with MoD. A jump from 26% to 100% is a very stupid decision as we cannot exactly predict the exacy outcome of such a step. A good way will be a gradual change rather than abrupt changes due to lack of such predictive abilities. This is the principle of reforms to indian economy should also be the guiding principle for changing the FDI cap.

The FDI cap can be raised to promote the inclusion of more universities/private labs within India to team up with foreign companies. The CAp from my wild estimates can be moved to 40%. but not 100%

NJS said...

There will be both Advantages / Disadvantages in increasing 100 % FDi , they can allow atleast 49 % FDI .

Anonymous said...

If foreigners want to fund our Defence infrastructure , should we really be sad? :)

AK said...

OxyMoron is the word that comes to mind after reading this article. Shri Antony does not want even 50% FDI in defence because that will kill the DPSUs and will be bad for local defence industry.

However, he is ready to import 70% of the defence equipment directly from foreign suppliers costing ten times over what Indian made systems will cost.

Everyone knows the quality and quantity of stuff that DPSUs make. All the OFBs can't even produce enough INSAS rifles for military and para military forces. BEML can't convert LHD vehicle to RHD.

India imports rifles, mortars, artillery guns, submarines, planes, radars, missiles, ships and everything in between. Everything is imported except nukes and ICBM.

In such a bleak scenario it is hard to fathom how MoD cannot allow FDI in defence sector. DPSUs like most PSUs can never create the culture of quality and accountability that private sector has. If Shri Antony and his minions don't allow private participation then we will be importing everything for a long time to come.

Anonymous said...

They dont want to fund your defence infrastructure, they want to get access to your tax money, while giving you peanuts and screw drivers, while the actual value addition continues to happen abroad. There is something in the mercantile mindset that always bends over, as seen in the DIPPs proposal.

Anonymous said...

we will buy 70% imported weapons but wont allow more than 26% FDI? It sounds funny. We should care a dam about the public sector jobs and open up FDI till at least 51% so that they bring in critical technologies

Anonymous said...

I think the idea of giving 100% FDI simply means murdering our defense capabilities for foreign interests (of course interest of some so called Indians). This is simply an eye wash and not just a solution. !00% FDI will do a direct reverse effect to all our achievement over the last decades. It can make our country completely docile to the greedy foreign arms dealers. We have got enough experience that no country will give us the new generation stuff. Russia is ready to spare us some of the reasonably new technologies due of the fear that any denial will lead to increase in our R&D and eventual self reliance which will cause them badly in billions in their arms exports which is their life blood .One thing is sure only our R&D can give us the cutting edge technology where us almost or all technological stuffs procured from outside is bugged or flawed which will backfire at the time of a war which will be disastrous.


We can claim that we are importing 70% stuff from outside. But we have no obligations to them and we can reduce it at any time by growing our public and private sector companies. If you simply open our door to a 100% level, then our nascent defense industry will crumble and then the international firms will start raising their price tags of their outdated products.

I wonder why we don’t understand that at a time when the recession affected world except China and India is drastically cutting their defense budgets, the 26% is such a tasty cake for which almost all of the international companies are ready to kill each other. Initially they make show offs to raise it to 49% or 100%. Bottom-line is most of them already makes arrangements to invest and fight fiercely for the already provided 26%. We on the other hand are ready to bow before them without knowing that we have the upper hand in this game.


In a time of such huge opportunities I also believe it’s good to have a defense minister who is slow but not corrupt (No doubt he is still responsible for not implementing a strong and effective management to the public defense sector, while pampering them). If it’s a well corrupted defense team it’s a chance of a century to earn well and tell us that we have made a big step in defense production .So these are times when we should be very calculative to sustain our thrive to a world power status. The initial reluctance and opposition of the international firms are short lived and if we stand stern they are left with no other choice because it’s necessary for their survival where the rest of the world is shutting the doors to their defense budgets.

joydeep ghosh said...

whether 26% or 100% or 49%, what matters is how much ToT will actually happen. But few answer are needed

Q1. How long will be the gestation period for a FDI backed unit to start production.

Q2. Will there be a cap on production levels as, so as to produce only that much to meet IA, IAF, IN needs.

Sorry, that will pull back big co even if 100% FDI is ok.

Q3. Will any foreign company coming with FDI make India a hub to supply weapons to other countries.

Q4. In which sector MoD wants FDI needs to be clarified, ie small arms, ammunition, defense software, defense metallurgy.

Anonymous said...

Great decision. I agree with it completely. Under no circumstances should FDI more than 49% be allowed. And that FDI % should be allowed should be on case-by-case basis with only the most sensitive and critical tech products getting 49% FDI approval.