Industry hails hiked FDI in defence, experts cautious

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Vishnu Makhijani | 08 Aug, 2014
India's manufacturing sector Thursday largely welcomed the government's decision to hike FDI in the defence sector to 49 percent but security experts said this was not enough to attract the big players.

Industry lobby CII welcomed the hike from 26 percent to 49 percent with full Indian management and control, saying it was a "historic moment" for the industry to collaborate with foreign Original Equipment Manufacturers (OEMs) and "create state of the art platforms and solutions", within the country.

"This would definitely encourage MNCs to get into co-development and co-production arrangements with Indian companies," Confederation of Indian Industry director general Chandrajit Banerjee said.

The cabinet Wednesday evening decided to hike the cap in the defence sector, that has an allocation of $38 billion for this fiscal, a move that can potentially help India curb its import bill on military hardware, 70-75 percent of which is sourced from overseas.

This was in keeping with Finance Minister Arun Jaitley's commitment during his budget speech July 10.

Noting that capital and technology are the two important aspects of advanced manufacturing, Banerjee said that with the hike, the Indian government "has made its intentions clear to the world that we mean business".

"Development of technologies in India would also mean that Intellectual Property Rights can reside in India," Banerjee added.

CII deputy director general Sujith Haridas pointed out that many items in the defence sector had already been delicensed and that 100 percent FDI was already permitted.

"This is a huge opportunity for SMEs to build up their manufacturing capabilities as the 'Make' category (in the Defence Procurement Procedure) will ensure Indian companies benefit," said Haridas.

Salt-to-software conglomerate Tata Sons too was upbeat.

"We do see the need for significant investment in the sector and such investment, including from the Indian private sector, deserves encouragement. The Tata group's presence in the sector, as demonstrated in the Defexpo this year, is substantial, growing and reflects our commitment to playing our role in the growth of the sector," a Tata Sons spokesperson said in Hyderabad.

Tata Advanced Systems Limited (TASL), a wholly owned subsidiary of Tata Sons, has four units in the Aerospace Special Economic Zone at Adibatla in Hyderabad. It has partnerships with Sikorsky, Lockheed Martin and RUAG Aviation for different units.

Echoing the general sentiment was the Punj Lloyd Group that manufactures a range of equipment for the armed forces.

The hiked cap "will now encourage foreign defence firms to partner with Indian companies and yield better returns on the investment. It will also encourage OEMs to bring in latest technologies to Indian partners which will further stimulate technological and manufacturing capability in the sector," Group chairman Atul Punj told IANS.

*We congratulate the government on finalizing a nuanced and optimal approach towards FDI in the Defence Sector and welcome the raising of FDI limit to 49 percent," SP Shukla, Member-Group Executive Board and President- Defence Sector & Group Strategy, Mahindra & Mahindra, said in Mumbai.

"This will facilitate higher commitment by current and potential foreign investors in their joint venture projects, both through increased investments and technology transfers.

" We at Mahindra Defence, with our technology portfolio encompassing all three wings - army , air force and navy - are committed to develop and absorb the latest technology to build a wide range of sophisticated defence equipment to serve the nation," Shukla added.

Foreign vendors were, expectedly, pleased.

"FDI has immense potential to enable India's desire to be self-sufficient in defence production, by producing high tech systems in collaboration with foreign firms in India," Air Vice Marshal (Retd.) Arvind Walia, Regional Executive, India & South Asia, Sikorsky Aircraft Corp, who is currently travelling in the US, told agency in an e-mail interaction.

"With the liberalisation of the existing FDI regime, we are hopeful to reach a stage in which the Indian private industry could channelize its energies to indigenise defence production. India should aspire to be seen as a regional hub for global outsourcing of defence equipment owing to its geo-political location. This will not only enable economies of scale but also considerably decrease India's procurement rates.

"We are looking forward to a higher increase going forward that could result in increased capital inflow, capability development, build human resources talent, establish stronger manufacturing base in the country and help transfer high end technology to make the country self-reliant and establish a modern and self-sustained ecosystem. A higher FDI limit, would provide opportunities to further contribute in the advancement of India's defence sector by offering world-class innovative products and also explore strong partnerships with public and private sector enterprises that share similar synergies to work towards indigenization. In 2010, DIPP had suggested pegging FDI cap at 74 percent; this time around the proposal seems to be to allow even 100 percent FDI if it brings in state-of-art technologies," Air Marshal Walia added.

"Quantitatively, this is a step in the right direction by the government, and welcome. Qualitatively, this still doesn't alleviate the concerns about loss of control on knowledge and IPR. Also a non-controlling stake wouldn't necessarily encourage investments that are primarily meant for export-oriented manufacturing. On a case-to-case basis, this step can enable investment where focus is on domestic requirements and potential loss of control of IPR is not a major concern," Boeing India president Pratyush Kumar said.

Aero engine major Rolls Royce termed the hike "a step in the right direction" towards realising India's efforts in obtaining strategic self-reliance.

"It will help catalyse rapid indigenisation and substantially increase the attractiveness of the sector as a place to transfer technology and set-up a manufacturing hub. At Roll-Royce, we remain as committed to India with or without the increase in FDI and work towards the indigenisation of the Indian defence industry by exploring strong partnerships with companies who share our goals," said Kishore Jayaraman, president, Rolls-Royce India & South Asia.

"The government has moved forward. It's a good thing," said Pritam Bhavnani, who heads the high-growth India, Singapore and Gulf regions for aerospace at US major Honeywell.

However, a seminar coincidentally held here Thursday noted that the government should define a comprehensive road map for the aerospace and defence sector, in the absence of which the the manufacturing sector "is not able to cater to India's current requirements and is thus forced to look outside to meet the requirements".

Among the recommendations of the seminar, organised by the Automotive Components Manufacturers Association of India (ACMA) were:

* Creating a focused action plan for upgrading skill-sets in MSMEs

* Making the DPP's Technology Perspective & Capability Roadmap (TPCR) more

specific to help industry effectively plan long-term investments in the sector.

* Domestic production of aerospace and defence equipment should be accorded 'deemed exports' status. All applicable taxes and corporate tax on production of defence products should be zero-rated for 10 years.

Noted defence analyst C. Uday Bhaskar said the hike was "welcome" but "may not be effective to realise India's objective of obtaining access to critical technologies and best manufacturing processes in the defence sector and enlarging India's indigenous defence capabilities". "Most big companies would be hesitant (to invest) as they would have no say in the decision-making process (as 51 percent equity would remain with the Indian partner)," Bhaskar, Distinguished Fellow at the Society for Policy Studies, told agency.

"Some countries permit 80-90 percent FDI in the defence sector," Bhaskar pointed out, adding that the "ecosystem has to be made enabling in the long term" to attract adequate foreign investments.

India Strategic defence magazine editor Gulshan Luthra concurred.

"FDI of 74 or 100 percent cannot cause harm. Foreign companies could set up production lines as part of global supply lines and India would gain the technologies it needs," Luthra told agency.

"The previous and the present governments have bowed to the pressure of the Indian industry, both public and private, in limiting the FDI," he added.

(Mohammad Shafeeq (Hyderabad) and Quaid Najmi (Mumbai) contributed to this story) (Vishnu Makhijani can be contacted at vishnu.makhijani@ians.in)