FDI in Defence – ease of business?
 

 

Photo Credit: ADA

On November 10, the government announced a host of measures to ease business along with FDI reforms in 15 sectors including defence, stating that FDI bids worth up to 49% of equity will now progress through the so-called "automatic route". As per informed sources, “This effectively means that foreign companies will now be able to bypass the government’s Foreign Investment Promotion Board (FIPB) in finalizing defence investment deals”. Up to US$ 1 billon FDI now does not need FIPB approval. According to the media, citing the Finance Minister, government opted to use Rule 12 of the Transaction of Business Rules to usher in the changes. The clause allows for "departure from rules" and says: "The Prime Minister may, in any case or classes of cases permit or condone a departure from these rules, to the extent he deems necessary."

FDI increased to 49% in Defence

In the Union Budget 2014-15, it was announced that the composite cap of foreign exchange is being revised to 49% with full Indian management and control through FIPB route for defence sector. PIB later issued a press release on the security implications of FDI in Defence -

Security Implications of FDI in Defence Sector
http://pib.nic.in/newsite/PrintRelease.aspx?relid=106601

 

Our publications had also extensively reported on this increased hike in FDI to 49%. Kindly refer to the following links -

SP's MAI Issue No. 12 | June 16-30, 2014

FDI in defence – Welcome move
By Ranjit Kumar
http://www.spsmai.com/military/?id=3032&q=FDI-in-defence-%96-Welcome-move

 

SP's MAI Issue No. 14 | July 16-31, 2014

2.5 per cent of GDP ideal
By Air Marshal (Retd) B.K. Pandey
http://www.spsmai.com/military/?id=3098&h=2.5-per-cent-of-GDP-ideal

 

SP's MAI Issue No. 21 | November 01-15, 2014

Defence indigenisation takes off FDI cap Loosened?
By Lt General P.C. Katoch (Retd)
http://www.spsmai.com/military/?id=3268&q=Defence-indigenisation-takes-off-FDI-cap-Loosened?

 

SP's Aviation Issue 08-2014

49% FDI in Defence – A Step in the Right Direction
By Pratyush Kumar, President Boeing India
http://www.sps-aviation.com/Story_issue.asp?Article=1490

It may be noted that FDI in defence had already been raised from 26% to 49% (or more basis involving ToT on case-to-case basis) in 2014 and this was done because in the previous 14 years we could attract less than US$ 5 million. Yet despite having raised the FDI limit to 49%, the defence industry has only managed to bring in a miniscule US$ 0.08 million (Rs 48 lakh) of FDI leaving it virtually deprived of foreign investors. More significantly, despite having promoted defence as one of the prime sectors under the ‘Make in India’ initiative, the defence sector has contributed zero per cent of the total FDI inflow in the country. Obviously, while raising the FDI in defence from 265 to 49% we did not incisively analyzed what should be the level of FDI that would make the defence sector lucrative to foreign companies? More importantly, day after the 49% FDI in defence was announced during the budget session of 2014, the visiting President of Federation of German Industries met our Defence Minister and later told reporters that German Industries would not like to invest in India since with 49 percent FDI they would not have control over selling the products. Ironically, defence equipment currently held by us is 50% obsolete, the proportion of state-of-the-art equipment also needs to grow from its current level of 15% to at least double. Acquisitions under the LTIPP, is expected to include procurements worth US$ 100 billion by 2022.

According to the Financial Times of UK, in the January-June period of this year, India surpassed US and China as the biggest FDI destination with US $31 billion investments compared with US$28 billion in China and US$27 billion in the US. In the first half of 2014, India had received $12 billion worth FDIs, thus more than doubling the kitty in this year first half. So, when India has become such a lucrative FDI destination, why can’t we attract FDI in defence? Clearly the fault lies within, the red tape being one reason which may be by default or design. Why to talk of FDI, we are obviously not letting our private industry contribute equally in defence, despite the capability. Take the case of the TCS, where development of the prototype by the Larsen & Toubro, Tata Power SED, and HCL Ltd Consortium is stuck past several months without MoD addressing issues of equivalent tax incentives provided to BEL and control over IPR raised by them. Past several years, the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry has been recommending 74% FDI in case of ToT and 100% FDI in case of making available state of the art technology. Now take the case of the Tejas, which despite having scores of imported assemblies and parts, IAF is likely to buy number of squadrons but HAL will unlikely be able to meet total requirements of the IAF since the number of their operational squadrons are declining rapidly. So this is one area (aerospace) where more production lines for Tejas could be established through JVs. Same goes for helicopters, transport aircraft, weapon platforms and other defence equipment.

We must acknowledge we have glut in technology and the military has major voids which we need to make up through FDI. We need state-of-the-art technology which we can get exploiting our strategic partnerships, some willing if they find it suiting their own national interest given the rapidly changing geopolitical scene. We therefore need to revisit the FDI in defence and make the defence sector unambiguously lucrative for FDI. Just facilitating foreign companies to bypass the government and the FIPB in finalizing defence investment deals is unlikely to suffice. The issue of IPR and the number and guarantee of what would be absorbed in India too need to be addressed. It is also noteworthy how China despite being under sanctions has managed massive JVs with foreign collaboration in dual use civil-military technology.