Easing defence FDI to bring in hi-tech

Defence analysts say that the interest shown by the government to relax foreign direct investment in the defence sector from the current 26% to 49% will turn out to be an energy booster for all those foreign companies having interest but are sceptical of getting into a joint venture with an Indian counterpart.

Written by Shweta Bhanot

November 10, 2008 23:32 IST

Defence analysts say that the interest shown by the government to relax foreign direct investment (FDI) in the defence sector from the current 26% to 49% will turn out to be an energy booster for all those foreign companies having interest but are sceptical of getting into a joint venture (JV) with an Indian counterpart.

Their scepticism arise from the fact that they do not want to compromise on their patented technology and look for better hold in the JVs. The move by the government will lead to faster development of defence industrial base in the country leading to increase influx of investment and entry of new players. It is also in sync with the government?s target of sourcing 70% of its defence requirements from indigenous sources by 2010, which is argued by experts as unrealistic.

Currently, FDI influx in the defence sector stands minimal. In the period April 2000- July 2008, the defence sector received FDI of Rs 2.37 million, equivalent to $ 0.05 million. India imports over 70% of its defence requirements at present.

As of 2007, there are more than 5,000 companies, supplying 25% of the market requirements, mainly through sub-contracting with the public sector companies, as per a report on the sector by Frost & Sullivan.

?Intellectual Property Rights (IPRs) is very close to the companies more so when it comes to defence technology. Nobody will bring in patented technology into a JV where they do not have a say,? said Dhiraj Mathur, executive director, PricewaterhouseCoopers (PwC).

This has been an area of concern for companies like Bombardier, Boeing and EADS to say, explains Nitin Kashyap, automotive analyst, Datamonitor India, adding that this move by the government will improve the sector on the technology front with defence budgets of companies getting large and more thrust given on the research and development (R&D) work by them.

Further, defence and aerospace technologies that later percolate down to civilian use will be like icing on the cake for the companies in the country.

Adds, Ratan Shrivastava, director, aerospace and defence, South Asia & Middle East, Frost & Sullivan, ?The matrix are different when it comes to building up defence industrial base. It needs faster inflow of investments in the area.?

This article was first uploaded on November ten, twenty eight, at thirty-two minutes past eleven in the night.