Editorial: 49ers in defence?

If global defence majors now have the incentive to partner Indian companies, the Indian private sector has its own compulsions for establishing foreign tie-ups. The most important of these is the need to mitigate commercial risks in that most fraught of development environments: defence products. Military systems, which are usually at the cutting edge of technology, require enormous capital to develop and there are never any guarantees of actual orders. The ministry had signalled its intention to subsidise private industry to the extent of 80 per cent of the cost of developing high-tech systems; DPP-2006 contains an entire "make" section, with the procedure for funding an Indian company to "make" a defence product. But that procedure has never been used and private Indian defence manufacturers have little choice but to look abroad for partnership, funding and technology. The problem is that no foreign major is comfortable with transferring proprietary technology to a company in which it owns barely a quarter share. Advanced technologies cost billions of dollars to develop; a 26 per cent share of the profits, say these companies, is small recompense. Their demand, in most cases, is a 49 per cent share, since the foreign majors believe that the government will insist on Indian control over the company.

 

Ultimately, the foreign majors' bargaining power will be determined by the level of cutting edge military technology that they bring to the table. Moscow successfully demanded a 50 per cent share in the Brahmos joint venture, since Russia contributed the technology for propulsion systems, which India was far from developing. Similarly Russian companies will get a 50 per cent share in the JV that develops the multi-role transport aircraft, because of the technologies that they supply. If South Block is uncomfortable with crucial technologies being developed by JVs in which there are substantial foreign holdings, the ministry will have to create an environment in which Indian entities (state-owned defence undertakings, private companies, and the Defence R&D Organisation or DRDO) can produce entirely Indian systems. That means urgently nominating the private sector RURs, generously subsidising their R&D, and assuring a minimum order that can help pay for their input costs.