Defence minister AK Antony?s strident opposition to higher foreign direct investment (FDI) limit in defence threatens to thwart any reforms the government may be looking in this area by increasing the cap to 74% from the current 26%. Though the union ministries of finance, home and commerce have converged to the opinion that FDI in defence should be increased to 74%, Antony has refused to budge: When contacted, he told FE: ?There is no change in the stand on FDI.?
The divisions came to the fore at a recent inter-ministerial meeting to consider the proposal of the department of industrial promotion and policy (DIPP) which is pushing for a hike in FDI limit. While finance minister Pranab Mukherjee and home minister P Chidambaram were in favour of the FDI hike proposal with caveats, Antony stuck to his guns, arguing that defence is a sensitive sector and should not be treated as any other business venture.
Finance minister Pranab Mukherjee, home minister P Chidambaram and commerce & industry minister Anand Sharma lent support to the DIPP move; however, to ensure that control remains in Indian hands and given the sensitivity of the issue since national security is involved, they proposed that any increase beyond the current limit be done purely on case-by-case basis. They also suggested that higher FDI be restricted to companies identified by the government with a good engineering track record and proven performance like having a turnover of Rs 5,000 crore and a minimum networth of Rs 500 crore.
A senior officer in the defence ministry said there has been tremendous pressure from other ministries for raising the limit even though there are many countries in the world who have not allowed big strategic shares to private players.
According to defence ministry officials, countries like Canada, China, Germany and South Korea tightened their defence FDI policies after 9/11, introducing methodologies to scrutinise FDI inflows in this sensitive and strategic sector.
Last May, DIPP had floated the discussion paper, making a case for increasing FDI to 74%. Interestingly, there has been no unanimous view from the industry either, with associations CII and Ficci favouring an increase only up to 49%.
However, all ministers unanimously agreed on the need to do away with the existing industrial licensing, required for manufacturing defence equipment.
Voicing his dissent to raising the FDI limit, Antony said: ?The issue of FDI in defence production has been discussed at various fora. The procurement policy, of which the offset policy is a part, is also continuously under review. The offset policy is being further expanded and will perhaps come into force shortly.?
Sharma said that production through licences under the present arrangement is not significant. He said that India is one of the largest users and importers of defence equipment; however, nearly 70% of its defence requirement is met through imports. ?Indigenous R&D has not kept pace with the requirements of present day warfare and manufacture. Transfer of technology has also proved to be an ineffective and slow process.
The procurement policy with offsets has not been able to attract investment. Maintenance and repair arrangements have been far from satisfactory as a result of which during the crisis periods, empowered delegations have had to be sent for urgent procurement of defence components. Therefore, rather than importing equipment from abroad, manufacturing within the country, through foreign capital, with full transfer of state-of-the-art technology may be a better option,? Sharma concluded.
Home minister P Chidambaram said the biggest hurdle is licensing policy, which should be amended to encourage investments in the sector. In his view, select Indian companies with a good track record could be issued licences to manufacture items required for defence production. Based on their technology absorption, they may be allowed to scout for appropriate technology partners at commercially viable terms. He said that with such corporates, the level of FDI would not matter whether it is 49% or 74% as long as the control is in Indian hands. FM Mukherjee said the time is now ripe to move forward in the matter. He agreed with Chidambaram’s view that technology transfer would happen only if the private sector can play an active role while acknowledging that the government’s efforts on raising the level of investments in the sector have not been meaningful so far.
