Industry sneers at Defense FDI announcement

The announcement of the Indian government on its policy on Foreign Direct Investment (FDI) in the defense sector on Tuesday was greeted with eye-rolling derision by industry players in Delhi, calling it too little to make any difference to acquisition of new technologies or boosting domestic defense industry.

Mr Sharma: In defence production, 26% through FIPB route stays; for state of art technologies, FDI beyond this to be approved through CCS.

— PIB India (@PIB_India) July 16, 2013

Defense Minister AK Antony had recently written to Commerce Minister, Anand Sharma that ‘the FDI cap in the Defense Manufacturing sector should remain at 26 percent. However, wherever FDI beyond 26 percent is likely to result in access to modern and state of the art technology into the country, decisions can be taken to allow higher FDI on a case to case basis by the Cabinet Committee on Security.’

The Union cabinet took this same line on Tuesday.

StratPost solicited reactions to the announcement from industry executives of both Indian and foreign companies. Most pointed out that the general rule remained the same, with investment restricted to 26 percent, subject to approval by the Foreign Investment Promotion Board (FIPB). The only thing different was the offer of a hope that in certain circumstances, subject to approval by the Cabinet Committee on Security, this percentage could be increased beyond 26 percent.

“What’s changed?” asked one senior industry executive. “In theory, yes there is the hope of increased FDI being allowed. But cabinet could anyway have allowed any level of FDI it wanted. They’ve never done it,” he said.

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Mahindra and Mahindra, and BAE Systems had applied for approval of a venture with 49 percent FDI in 2008, which was not approved, restricting the foreign investment to 26 percent. In 2009, the FIPB rejected proposals for a joint venture between Tata Advanced Systems and Israel Aerospace Industries as well as a venture between EADS and Larsen and Toubro. In both cases the FDI was no more than 26 percent.

In fact, the only instances where increased FDI has been permitted has been in the Indo-Russian inter-government ventures like BrahMos, Multi-role Transport Aircraft (MTA) and Fifth Generation Fighter Aircraft (FGFA). In these cases, India clearly had no choice in the matter if it wanted to become a beneficiary of advanced technologies.

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He pointed out that ‘this is an implicit admission that acquisition of high technology will not take place without reconsidering the restrictions on FDI. This, by itself, shows that the premise of the existing policy is nonsensical’.

Across the board, industry representatives contacted by StratPost questioned the definition of ‘state of the art technology’. “How do you define it? There are a number of technologies that while making up minor components of larger systems, could still be considered advanced technologies. How is that going to be decided?,” asked one industry executive.

Another followed up on this and questioned the rationale for restricting the possibility of higher FDI to ‘state of the art technology’, saying, “When a foreign company comes to India, their products include low as well as high technology. How do you create a Chinese wall between the two in terms of an FDI-based venture?”

“And what about IP (Intellectual Property)? Why would any company that has devoted billions to developing advanced technology, hand over control over their IP in the hope of a CCS approval that has never happened before?” he asked.

“This has added to the confusion and created another layer of bureaucracy for industry to jump over. While you’ve admitted the logic of increased FDI, you’ve taken it to another level and ring-fenced it with barricades that will be completely arbitrary as long as defined parameters are absent,” he said.

“This just increases the potential for considerations other than commercial and technical to come into play when taking these decisions,” he added.

Indian industry has generally been reluctant to endorse increased FDI. But even then, one Indian industry leader said, “You can watch this policy play out for a few years. I don’t think you’ll see anything substantial come out of it.”

Last month, industry body, the Federation of Indian Chambers of Commerce and Industry (FICCI) criticized the revised provisions of the DPP, for failing to offer enough encouragement to Indian industry and create a competitive, ‘level playing field’ for it.

These revisions had faced criticism on multiple counts, even when they were first proposed.