Indian industry split on FDI cap in defence manufacturing? (Lead)

July 26th, 2010 - 6:50 pm ICT by IANS  

New Delhi, July 26 (IANS) India Inc. seems split on capping foreign direct investment (FDI) in defence manufacturing with a leading lobby asserting Monday that this should remain at the present 26 percent while another body had said previously that this should be raised to 49 percent.

“Any increase in FDI cap in a strategic sector like defence will require careful thinking and analysis,” Federation of Indian Chambers of Commerce and Industry secretary general Amit Mitra said Monday while releasing the lobby’s response to a commerce and industry ministry working paper suggesting that the cap be raised to 74 percent and to even 100 percent.

Mitra also noted that despite the 26 percent FDI cap, the defence sector has already attracted top overseas defence OEMs (original equipment manufacturers) like BAe, EADS, Sikorsky and Lockheed Martin to hugely invest in India’s defence sector.

In May, the Confederation of Indian Industry (CII) said FDI in the defence sector should not be raised to 100 percent but capped at 49 percent.

“Industry is not in favour of 100 percent FDI in the defence segment. Increasing the FDI limit to 49 percent would be beneficial,” CII said.

The ministry’s paper noted that raising the cap to 49 percent “will not really help us in getting the best technology partners to invest in India”, adding that by merely increasing the limit to 49 percent “we may be accused by posterity of doing too little and too late”.

Therefore, “in case we really want to have the state of the art technology, we have to permit anything above 50 percent if not 100 percent. It may, therefore, be desirable to allow either 100 percent or 74 percent as in the case of the telecom sector”, the paper says, pegging its recommendation at the latter figure.

The ministry has asked for all stakeholders for their views and opinions by July 31.

The defence ministry often says that the existing cap could be raised to 49 percent in selective cases but has been reluctant to do so when proposals are actually made.

FICCI’s Mitra also noted that countries like Canada, China, Germany and South Korea have revised their FDI policies in defence post 9/11, making them “much more stringent. They have inducted methodologies to punitively scrutinize FDI inflows in this sensitive and strategic sector”.

“This is not like soap, butter, fast moving consumer goods (FMCG) or the steel industry where 100 percent FDI can be allowed. It is one of the most important sectors of our country and we are just saying that careful thinking should be applied before allowing for more FDI into the industry,” Mitra maintained.

“We want more and more private companies to come into this sector and to build capability and capacity before we allow any more FDI, we have suggested some guidelines in this regard,” he added.

Among the guidelines, he said, “there must be a mandate for at least 20 percent extra indigenous content in defence products produced through 49 percent JVs from the currently 50 percent limit applicable for all other Indian companies within the 26 percent FDI limits.”

“If there is 49 percent FDI, than under no circumstance should the 51 percent Indian ownership pattern be altered and the management of the company would be Indian,” Mitra contended.

FICCI has also suggested that:

* Higher FDI should be clearly linked with the full platforms being produced and has to be a minimum capitalization of $100 million.

* The proprietary technology content being inducted in the JV is that what is sought by the country and will form the basis of further indigenous technological development.

* The JV provides an undertaking to source between 50 percent to 70 percent of their components/ subsystems by value, indigenously, by nurturing tierised Indian vendor industries.

* Export obligation of 10 times the equity must be committed by the OEM within 10 years of entering into the contract.

* The technology received should have no restrictions on its global exploitation, since there are dual use technology restrictions and a technology denial regime in many developed countries.

FICCI also said that exemptions to the 26 percent FDI limit “should be done through wider participation of industry in private and public sectors and should not be the exclusive preserve of Department of Defence Production & Supply”.

Pointing out that FDI and transfer of technology are not always directly proportional, “so raising FDI is no guarantee for true transfer of technology”.

“The fact is that leveraging latest technologies from overseas suppliers would be difficult even if the FDI ceiling were raised as the OEMs exercise no control over the release of technology which is exclusively under their government’s control”, FICCI said.

Thus, rather than raising the FDI cap, FICCI has suggested a series of measures “to facilitate a robust and qualitative growth” of the Indian defence industry, among them the creation of verticals “that are self-sufficient, self-reliant and export capable and across industry sectors (public and private)”.

–Indo-Asian News Sevice

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