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FDI in defence: Modi’s first step not quite there – Analyst

While Tuesday’s DIPP Press Note on Defence FDI is a welcome move, there is no need for the government to impose needlessly stringent conditions on foreign companies who want to make their weapons on Indian soil, KPMG said.

The Indian government does not allow foreign companies to make the weapons that they sell to India within India. As a result, these companies have to make the weapons in places like the US and then ship them to India. Critics have long pointed out that such a policy is costing India thousands of jobs in defence production.

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The reason for the government not allowing foreign comapanies to manufacture in India is that India will have no control over what is being produced. The Narendra Modi government, with its emphasis on common sense over bureaucratic idiosyncrasies, was expected to allow foreign companies to manufacture jets and tanks in India, instead of forcing them to make the weapons elsewhere and ship them to India. In case of a war, shipments of weapons to India can easily be blocked by foreign powers, while India-based factories can still produce and supply armaments and weapons.

“The sophisticated defence equipment that we are importing today are coming from global equipment makers over whom we have zero ‘ownership and control’. However, if the same OEMs want to come and manufacture the equipment in India, we come up with such onerous restrictions and roadblocks. It’s ironic,” said Amber Dubey, Partner and Head of Aerospace and Defence, KPMG.

He also said no defence company is going to transfer its sensitive technology and secrets to its Indian unit unless it has at least 51% control and ownership over the Indian unit. The Narendra Modi government too has not allowed foreign ownership beyond 49%.

“The 49% FDI limit may not entice global equipment manufacturerss and their respective governments. The defence ministry should consider 74% FDI with adequate checks and balances like local staffing, local value addition, exit restrictions and export controls etc. That will encourage ‘real’ investments and also ensure ‘real’ knowledge transfer to Indian employees and JV partners. The choice is ours”, he added.

“Our approach towards ‘ownership and control with Indians’ needs rethinking.”

Dubey, however, said some progress towards a rational manufacturing policy has been made with Tuesday’s press note from the department of industrial policy and promotion.

“The amended FDI policy addresses some of the industry’s concerns. A plain reading of DIPP’s Press Note 7/2014 shows that the condition of 51% equity ownership by a single Indian partner has apparently been dispensed with. So is the three year lock-in period for non-resident investors. The ban on portfolio investors has also been removed. These are positive developments,” he added.

Within the clarification that came out on Tuesday, Dubey said, there are certain ambiguous words that are open to interpretation and can be used to create legal hassles for would-be investors, if any.

“Ministry of Defence would do well to define “state-of-the-art-technology” (SOAT). These can be subjective and are susceptible to interpretation issues, bureaucratic delays and judicial challenge by interested parties. The condition on ‘self-sufficiency in design, product development, maintenance and lifecycle support’ needs a rethink. These do not need to be considered at the FDI approval stage. Once a company wins a contract these ‘lifecycle support’ requirements will be part of the contract conditions anyways. Why force it at the company formation stage,” he asked.

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