CII and FICCI disagree on raising FDI in defence

By Ajai Shukla

Business Standard, 12 Jun 14

Any decision to raise the foreign direct investment (FDI) cap of 26 per cent in defence production would be contentious. Sharp disagreement on the issue has surfaced between India’s biggest two industry bodies --- the Confederation of Indian Industry (CII), and the Federation of Indian Chambers of Commerce and Industry (FICCI).

CII, which includes manufacturing powerhouses like Bharat Forge, sees higher FDI as a catalyst for defence manufacture and job creation. On the other hand, FICCI, which includes innovation majors like Larsen & Toubro and Tata Power (Strategic Electronics Division), say higher FDI will not translate into greater indigenisation. Since defence technology developed by foreign original equipment manufacturers (OEMs) is controlled by their governments, FICCI says its transfer will be based on strategic considerations, not company ownership patterns.

On Tuesday, CII president, Ajay Shriram, welcomed the government’s proposal to raise the FDI limit. Lamenting that just $4.8 million of FDI had flowed into India since private firms were allowed into defence in 2001, Shriram said permitting foreign firms to own majority stakes in Indian defence companies would leverage India’s purchasing power, IT infrastructure and manufacturing potential to make the country a “key global manufacturing hub for defence systems and equipment.”

Earlier, in a 2012 report titled “Creating a Vibrant Domestic Defence Manufacturing Sector”, CII had projected that the defence and aerospace sector could create 10 lakh new jobs in the country. On Tuesday, CII said this would be accelerated by liberalising FDI.

The CII statement endorses “majority equity” for foreign OEMs without specifying an upper limit. The Department of Industrial Policy and Promotion (DIPP) has recently circulated for comments a proposal that mentions three possible levels of FDI --- 49, 74 and 100 per cent.

FICCI, in contrast, wants FDI capped at 49 per cent, subject to tight conditions. Writing to DIPP in 2012, FICCI said control must remain in Indian hands; the foreign OEM must brings in “key technologies as required in the priority list of the Ministry of Defence”; the foreign company’s home government must provide “in-principle permission to share technology with Indian partner”; Intellectual Property Rights (IPR) generated by the joint venture must reside in India, as well as other conditions.

FICCI officials reject the notion that raising FDI stimulates domestic manufacture. They point out that although 74 per cent FDI was allowed in telecom, which was raised to 100 per cent last year, India’s electronics import bill is on course to surpass the oil import bill by 2020.

In contrast, defence self-reliance is highest in the nuclear, space and ballistic missile fields, where international technology was comprehensively denied to India. In these three fields, government agencies partnered the private sector to develop indigenous technologies and systems.

Rahul Chaudhry, who was a member of the Vijay Kelkar Committee on defence indigenisation, and who heads a leading private sector defence company says, “The notion that higher FDI will increase indigenisation and create jobs ignores the fact that value lies not in build-to-print know-how, but in design, i.e. in “know-why”. The defence public sector in India has created many assembly lines for “Made in India” equipment. Yet we have never had control over the technology that goes into what these assembly lines build. What we need are “India Made” products, designed in India, with the IPR residing here.”

“If permitting 100% FDI for building products for the world largest cellular phone market has not spawned a single world-class Indian company that manufactures cellular handsets or infrastructure, how will it happen in defence?” asks Chaudhry.

Even so, the BJP seems poised to liberalise FDI in defence. Addressing parliament on June 9, President Pranab Mukherjee said, “We will introduce policies to strengthen technology transfer, including through liberalised FDI in defence production.”

In its election manifesto, released in May, the BJP promised it would “encourage private sector participation and investment, including FDI in selected defence industries.”

The current FDI cap was promulgated in 2001, when defence was opened up for the first time to the private sector. The DIPP’s Press Note No 4 of 2001 (paragraph iii) said, “The defence industry sector is opened up to 100% for Indian private sector participation with FDI permissible up to 26%, both subject to licensing.”