Indian, foreign industries divided over raising FDI cap in defence: CII

The Airborne Warning and Control System (AWACS) aeroplane, an advanced form of IL-76 aircraft. File photo   | Photo Credit: Shanker Chakravarty

Indian and foreign industries in defence sector are divided over raising the Foreign Direct Investment (FDI) to 100 per cent, a survey has found.

While the Indian industry, including the Small and Medium Enterprises (SMEs) are in favour of hiking the FDI limit to 49 per cent, foreign companies feel limiting it would make it an “unattractive proposition”, the study found.

The study ‘FDI in Defence - A Case for Review’, released here today by Confederation of Indian Industry (CII), said the demand was for a higher FDI cap in defence industry over the existing 26 per cent.

“The major proponents for increasing FDI cap, apart from the foreign vendors, are the SMEs and larger organisations seeking to diversify into defence production,” the study said.

They believe that increasing FDI limits would help to secure the transfer of key technologies to India, and would boost the foreign capital investment available to them.

“Despite attractive defence projects in the pipeline, certain foreign vendors felt that where Transfer of Technology (ToT) was involved, the returns likely to be generated on the basis of the current FDI regulations - coupled with the lack of control they would have over the technologies and know-how they are being asked to provide - makes entry into the Indian market an unattractive proposition,” it said.

The CII found that the FDI issue was driven by a number of factors. These were sovereignty concerns in respect to the ownership of core strategic industries like defence; government’s desire to rapidly acquire more advanced technologies; and the assistance foreign players can provide to SMEs.

That apart, there were concerns of the larger players, both private and defence public sectors units, which felt greater foreign involvement would be at the expense of their own businesses.

Further, a number of foreign companies were keen on making India their “home market” - both a major domestic sales market and a global manufacturing hub.

“But the current FDI restrictions constrain their ambitions in this regard. The result is it has limited FDI inflows to India with a total of only Rs 7 million between April 2000 and February 2009,” the study said.

Among the other key findings were that the industry was not in favour of 100 per cent FDI in defence segment, though more than 50 per cent of CII members wanted an increase in the FDI limit to 49 per cent, which they felt would be beneficial.

“The FDI should not exceed 49 per cent,” the study said.

The CII members said the current 26 per cent FDI in the segment could be increased subject to Joint Ventures (JVs) also engaged in Research and Development and the Intellectual Property Rights (IPR) should rest with the JV.

They also opined that foreign partner should ensure access to the global market to the JVs, though it would be subject to Government approval.

“Foreign partner should bring high level specialised technology that is not easily available,” the members said during the study.

The study said the case for raising the FDI cap primarily rested on increasing investment and transfer of foreign technologies.

“Restricting the FDI limit to 26 per cent has been challenged by certain foreign companies as they believe that it acts as an inhibiting factor towards their entry into the Indian defence market,” it said.

Despite the on-going uncertainty as to whether the permissible FDI levels would be raised, many large foreign Original Equipment Manufacturers (OEMs) were already setting up JVs in India within the existing investment limits, though they were in the hope that FDI limits would soon be increased, it added.

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Printable version | Sep 24, 2021 4:43:47 PM |

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