New Delhi: India’s top officer responsible for defence acquisition has just dropped the bomb: The recently announced hike in the country’s Foreign Direct Investment (FDI) norms to 74 per cent will not apply to the Strategic Partnership programmes that the armed forces are pursuing.
This is big — at least for the Foreign Original Equipment Manufacturers (FOEMs) and those Indian companies that want to partner them on India’s big ticket acquisition and ‘Make in India‘ projects.
Ministry of Defence‘s Director General Acquisition Apurva Chandra told a webinar organised by the Assocham — an Indian chamber of commerce — that the FDI norms for the Strategic Partnership programmes will continue to be progressed at 49 per cent, as originally envisaged.
Two persons, who were invited and attended the webinar held yesterday, said Apruva Chandra did say this, but he did not explain or elaborate to the audience comprising of industrialists on why the government wanted to continue with 49 per cent FDI norms for the Strategic Partnership projects.
India has already announced two projects — the 114 Multi Role Combat Aircraft and 111 Naval Utility Helicopters procurement — under the Chapter-VII of the Defence Procurement Procedure of 2016. These two projects are worth at least $20 billion.
Two more programmes — the 123 Naval Multi-Role Helicopters and the six Next-Generation Submarines — too are being processed at present to be launched under the Strategic Partnership model. These two will cost upwards of another $10 billion.
Foreign companies intending to participate in the Strategic Partnership projects have previously communicated to the Indian government that they were not comfortable with the complexity involved with the implementation of the programmes under Chapter-VII of DPP-16, primarily because they cannot take responsibility for project that are not managed by them directly.
They were also uncomfortable with the 49 per cent FDI limit that meant they enjoyed no control over either the technology they transferred to India or the Indian entity that would be created to execute the Strategic Partnership programmes.
Under the Strategic Partnership model, the foreign companies join the programmes as technology partners, transfer technology and deliver the manufacturing processes to the Indian partner, which would be the prime executor of the projects.
American Lockheed Martin Corp. and Boeing Co., Swedish SAAB AB, European Airbus Defence and Space, French Dassault Aviation, Russian Aircraft Corporation MiG and JSC Aviation Holding Company Sukhoi are competing for the 114 combat jets programme. For the 111 Naval Utility Helicopter programme, Airbus Helicopters, Russian Helicopters Kamov, and Lockheed Martin Sikorsky are competing.
India’s Finance Minister Nirmala Sitharaman had announced the hike in the FDI limit to 74 per cent for defence production during her press conference in New Delhi on May 16. This was only the second hike in FDI limits since Narendra Modi won a convincing national elections in 2014 to become prime minister, first hiking the limit from the then 26 per cent to 49 per cent in July that year.
Jon Grevatt, the Asia-Pacific defense industry analyst at Jane’s, told Defence.Capital over phone from Bangkok that if the Indian government continued with the 49 per cent FDI policy for the Stategic Partnership programmes even after the announcement of an hike in the foreign investment norms, the foreign contractors may not invest in the projects.
“The reason for that is their technical involvement is very high with no control over the business, and this means high risk on their investment while the returns are low,” Grevatt said.
“There will be many problems for the Ministry of Defence in implementing the Strategic Partnership policy and it is quite possible, the programmes will not take off, just like the Raksha Udyog Ratna (RUR) policy that was announced soon after the defence sector was opened up in India for the private sector in 2001. Like in the RUR programme, which was scrapped, the Indian companies will fight among themselves, complain against each other, particularly those selected to be Strategic Partners and make it difficult for the government.”
Rajiv Nayan, senior research associate at India’s Manohar Parrikar Institute for Defence Studies and Analyses, said it is a proven fact that FDI has failed to bring proper investments into the defence sector in India till date and will continue to remain low whatever may be the FDI norms.
He specifically pointed out that despite allowing 100 per cent FDI with government approval for hi-tech defence products, not a single proposal has come to the Indian government till date, and official data available with the Ministry of Commerce and Industry will indicate the futility of FDI.
“Indian companies are quite capable of mobilising resources and to doing serious defence production work, either by developing products of their own through in-house research and development or borrowed technology bought from abroad.”
“The Indian government has to trust the Indian companies and do some handle-holding in the beginning, as support to the efforts from the Indian companies, both public- and private-owned; and reasonably remove all hurdles in their path to carry on defence production, business and exports,” Nayan said.