India Eases Defence Investment Barriers

23 June 2016

Global defence companies expect foreign investment in India’s defence industry to accelerate after the government eased restrictions in the sector.

India on Monday relaxed foreign direct investment thresholds in the retail, defence and civil aviation sectors, among others.

It removed a condition that foreign companies must bring in state-of-the-art technology to hold stakes of more than 49 per cent in local defence ventures. Foreign companies will now be permitted to own up 100 per cent of companies in the defence sector after obtaining government approval.

The country is one of the world’s largest arms importer, a distinction that Prime Minister Narendra Modi seeks to change by expanding local arms production and giving preference to locally manufactured weapons in bidding contests while also making it easier for private companies to do business in the sector.

Pierre de Bausset, president of Airbus in India, said the new rules brought India in line with other countries, which had been able to attract foreign direct investment.

“There will be much more foreign direct investment with this happening and along with it you’re going to see easier creation of jobs. So, I think it is going to be beneficial for Indian industry,” he said.

The defence industry is dominated by state-run companies that are plagued by quality issues and long delays in delivering equipment. As a result, India has become dependent on imports as it increased its military spending.

Persuading foreign companies to build more weapons in India could be a hard sell until the government starts making multi-billion-dollar defence orders, companies and analysts say. Several recent defence orders have become stuck over bureaucratic delays, while allegations of corruption marred the granting of key defence contracts in recent years.

“This decision will now bring in real investments provided the Defence Ministry also speeds up the procurement process and issues big-ticket orders,” said Amber Dubey, head of aerospace and defence practice at KPMG in India.

The country also faces a shortage of trained factory workers for the aerospace and defence industry, according to analysts, which could slow the country’s plans to become a global weapons-manufacturing hub.

India is seeking to modernise its defence industry as it faces a well-armed and increasingly assertive China on one border and its longtime rival Pakistan on another.

India’s defence industry attracted $US5.1 million ($6.8m) in FDI in the almost 16 years to the end of March, government data says. Over the same ­period, the services sector and construction industry each attracted $US51 billion and $US24bn, respectively. The computer software and hardware, telecommunications and car industries attracted $US21bn, $US18bn and $US15bn, respectively.

The country imported 14 per cent of globally traded arms in the four years through 2015, according to the Stockholm International Peace Research Institute. India’s domestic arms industry doesn’t produce competitive designed weapons, so must import them from abroad, the think tank said.

India is expected to become the world’s fourth-largest military spender after the US, China and Britain in 2016-17, according to IHS Jane’s. The publisher expects the country’s defence budget to reach $US64.8bn by 2020, compared with $US50.7bn in the 2016-17 financial year.

John Brosnan, managing director for India and Southeast Asia at BAE Systems, said the easing of foreign investment rules would “encourage more rapid indigenisation and investment”.

“With the right incentives and enablers, predictable decision-making timelines, productive partnerships between international original equipment manufacturers and Indian industry, and expansion of the existing talent pool among others, India can become an aerospace and defence manufacturing hub for the region and beyond,” he said.

In 2014, the government increased the foreign-investment limit in local joint defence ventures from 26 to 49 per cent.


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