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India Defence Online, New Delhi — In a recent move by the Indian government which may set a precedent in terms of the Foreign Direct Investment (FDI) norms in defence, the cap of 26 per cent FDI has been relaxed for Russia. The recent decision has been seen as an upsetting move for private firms.
The recent joint venture between state-run Hindustan Aeronautics Limited (HAL) and the Russian firm Rosoboronexport is a 50:50 venture for a transport plane and the project cost is estimated at Rs 2900 crore. The plane will be created for the Indian defence forces and will cater to the cargo airlines as well. The HAL-Rosoboronexport venture will develop a prototype within 51 months after starting work and make the plane in six years.
Although the current FDI cap in defence ventures stands at 26 per cent, the Indian government has made a provision to support 49 per cent FDI as a special case in the HAL-Rosoboronexport. It may be noted that India had decided to raise the 26 percent cap on FDI in the defence manufacturing sector to enable the co-development with Russia of the multi-role transport aircraft (MRTA) in 2008. The current move to relax the 26 per cent cap has left a lot of private players in a quandary as they feel that it’s a biased decision.
According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the premier association of business organisations in India, the requirement for a joint venture qualifying as a special venture must entail a guaranteed and genuine technology transfer as well as a localisation programme as part of the deal. Otherwise, the 26 per cent FDI cap in defence has been thoughtfully formulated and must not be altered.
The current FDI cap in defence sector of 26 per cent has been questioned and criticised by various industry sections within the country and its pros and cons have been weighed consistently. While the Defence Ministry vehemently supports the 26 per cent cap in FDI, the Industry Ministry advocated FDI of 74 per cent in defence and some sections even supported 100 per cent FDI.
The Commerce Ministry had suggested that raising the FDI cap will pave the way for greater technology from international majors and the much-needed investments in the defence sector. Even the private sector players support the raising of FDI caps in order to allow a larger share to foreign companies. This will allow the private players to gain from sensitive borrowed technology and also cut capital costs in setting up new manufacturing units.
However, the Indian Defence Ministry feels that it will stifle the burgeoning defence public sector undertakings (DPSUs). Even the premier organisation FICCI indicated that FDI and transfer of technology are rarely directly proportional. Hence, raising FDI is no guarantee for the transfer of technology. Besides, India is slated to attract major investments in this sector regardless of the 26 per cent cap and it will continue to spend on defence equipment in the future.
Indian defence news and strategic intelligence
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