India Inc against 100% FDI in defence sector

Companies want access to foreign markets, transfer of technology

Indian companies are opposing a move by the Modi government to allow 100 per cent foreign direct investment in the defence sector, saying they should get reciprocal access to foreign markets and the government should make it mandatory for foreign companies to transfer technology.

FDI in defence during 2000-2014 has been a meagre $4.94 billion of the overall $322 billion inflow. The existing policy allows FDI beyond 49 per cent in defence only if there is no transfer of technology.

A Cabinet note is learnt to have suggested that proposals for foreign investment of up to 49 per cent in an Indian defence company be cleared without this requirement.

"There is no reason why we should allow 100 per cent FDI in defence unless Indian companies get similar access in other markets," said an executive with Larsen & Toubro, one of India's biggest private defence companies, which produces critical components for missile systems.

"Foreign equity should be conditional on transfer of technology. The draft Cabinet note has proposed allowing 74 per cent FDI where there is a technology transfer. There is also a suggestion that the no-cap policy should be limited to cases where there is a transfer of state-of-the-art technology," he added.

"The foreign companies should be willing to transfer technology to India and there should be adequate training of Indian employees," the executive who did not want to be named said.

"We are not aware of the precise contours of government policy on FDI in defence," said a Tata group spokesperson. "However, we do see the need for significant investment in the sector and investment, including from the Indian private sector, deserves encouragement," he added.

The Tata group has nominated former Defence Secretary Vijay Singh on the board of holding firm, Tata Sons. The group's revenue from the defence business was Rs 1,700 crore in 2013 and it expects this to go up by 40 per cent this year. Defence orders across Tata group companies are about Rs 8,000 crore.

Reliance Industries, India's largest private company,  has signed an agreement with Dassault Systems of France to produce wings for the Rafale aircraft in India. This was after the Indian government agreed to buy 127 fighter aircraft from the French company.

Reliance and Mahindra did not reply to mails seeking comments on their stand on 100 per cent FDI in defence. But insiders say the groups support local control over defence companies.

Till 2002, private Indian companies were not allowed in the defence sector. The National Democratic Alliance government led by Atal Behari Vajpayee decided to open the sector with 26 per cent private participation after the Kargil war. Ammunition and spare parts were in short supply during the conflict due to international restrictions on selling arms while hostilities are on. Since then, Larsen & Toubro, Mahindra and Reliance have entered the sector, but have failed to make big inroads.

During the United Progressive Alliance's rule, Defence Minister A K Antony supported public sector units but private companies did not get big orders. Most requirements were met with imports.

Barring Pipavav Defence, which builds ships for the navy and coast guard, and Larsen & Toubro, no private Indian company has made significant progress in the defense business.