New Delhi, Dec. 29: The government is once again looking at the option of increasing the cap on defence FDI through the FIPB route in the face of immense lobbying by US and European military hardware suppliers as well as the domestic industry.
According to the rules announced in July, foreign direct investment of up to 26 per cent will be cleared by the Foreign Investment Promotion Board (FIPB), while proposals beyond this cap has to be placed before a cabinet committee.
However, both global and local manufacturers such as the Tatas, Reliance, the Mahindras and L&T want the cap on FDI through the more easily negotiable FIPB route to be raised to 49 per cent. Indian companies want the higher cap to come with a rider — the proposals should include technology transfer and joint research for future development.
The offset clause is a major hurdle before foreign companies. Top officials said the foreigners were finding it difficult to procure components from the country even as the offset clause makes it mandatory to purchase 30 per cent of the parts from India.
“Foreign manufacturers such as Boeing Military, Saab, EADS do not wish to bring their proprietary technology for high-tech weapons or spares into a joint venture in India unless they have a larger say in running the venture. They complain that at 26 per cent stake levels, they have virtually no control over the venture,” said top industry ministry officials.
Besides, the process of getting cabinet clearance for higher stakes is cumbersome and takes time.
Over the next few years, the Indian arms market is expected to be around $100 billion.
In the current year, the government was planning to spend around $14 billion on purchases and modernisation of defence equipment. However, with various deals caught up in red tape, the entire amount may not be spent.
The huge size of the defence orders, which makes India the world’s largest buyer of imported arms, is attracting big foreign names. But meeting the 30-per-cent offset clause is a problem.
The government allows offsets through direct purchase of components and services provided by state-run and private companies or through investments in defence industry and research.
India has long been looking at ways to leverage its defence purchases to build a sophisticated arms industry at home.
At one stage, it had toyed with the idea of giving foreign companies a majority stake in domestic defence businesses. The proposal was dumped as the government realised that foreign companies would never part with technology.
A government appointed panel headed by former SAIL and Maruti chief V. Krishnamurthy had cautioned that automatic 100 per cent FDI in many sectors was a hindrance to technology transfer. Hence, permissions should be linked to such transfers, preferably through joint ventures with Indian companies.
Domestic industry is in favour of this proposal and has been writing to the government for 49 per cent FDI with riders such as compulsory technology transfer.
Officials point out that like China, India can opt to reverse engineer products and build a weapon system. But instead of picking up foreign technology through reverse engineering, India has chosen to set up a “legal” arms industry built on technology transfer through joint or independent research.