Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

Discussion in 'Defence & Strategic Issues' started by Punya Pratap, Oct 10, 2014.

  1. Punya Pratap

    Punya Pratap Regular Member

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    IBN Online - Saurav Jha's take

    Thursday , October 09, 2014 at 11 : 50
    Can Videshi be used to benefit Swadeshi? Examining FDI in defence

    As military modernization gathers pace under the new Modi-led dispensation in Delhi, liberalized foreign direct investment (FDI) rules for the defence sector in its first budget seem to have taken cognizance of the the broad consensus among various domestic stakeholders that the previous 26 per cent cap on FDI in defence may have been too restrictive. Though no military industrial complex (MIC) in the 20th century was really built through foreign investment, India could nevertheless in this era of globalization leverage 'FDI in defence' as a force multiplier with adequate safeguards. However to make the most of 'FDI in defence' it is important to leave aside the rhetoric and closely examine what it can and cannot do. Moreover domestic aims vis a vis FDI will also have to be clear in terms of its role in boosting the defence industrial base(DIB) as well as generating employment. One overall political direction could be to use FDI to boost military exports and increase the domestic component supplier base that can be simultaneously leveraged through greater indigenous research & development (R&D) efforts.

    Prior to the budget, the Ministry of Commerce(MoC) circulated a note that proposed to create a three-tier rule structure governing FDI in defence with caps of 49, 74 and 100(i.e no cap) per cent based on the level of technology transfer (ToT) that a foreign original equipment manufacturer (OEM) would be willing to bring into India. The new government's first budget of course raised the level of automatic approval for FDI in defence to 49 per cent from the existing 26 per cent. The fact that the MoC was involved in this matter along with the Ministry of Defence (MoD), is indicative of the fact that the growth of the indigenous DIB is now being seen as an important part of India's objective of raising the share of manufacturing from 16 to 25 per cent of gross domestic product (GDP) as soon as possible.

    Indeed it is understandable that for India (like all non-petrostates), which uses a debt leveraged model for growth, it is imperative that public expenditure not 'leak' out of the economy as military imports and in that general sense having something built domestically even under FDI is preferable to direct imports from abroad. But then the devil is always in the details and while something may seem ridiculously simple, it often isn't.

    For one, the automatic route should not become an avenue for foreign OEMs to effectively takeover small and medium enterprises (SMEs) that have developed niche capabilities in the last twenty years while working on various strategic deterrence programs. It is standard practice across the world to maintain a strict database of such companies and closely monitor foreign attempts to gain managerial control. The inputs of our intelligence agencies working with DRDO, ISRO and DAE should be paramount in this regard. Such takeovers will neither generate jobs nor result in ToT but could serve to jeopardize India's security and have to be prevented at all times, obviously.

    Indeed 'FDI in defence' should be used to increase India's supplier base rather than stunt it. In that context, strict localization norms should accompany non-automatic approvals i.e of say up to 74 and 100 per cent. It should be made clear that any foreign OEM with a majority stake in an Indian subsidiary will have to accomplish domestic sourcing targets in a time-bound and credible manner barring which it will not be allowed to bid for a whole range of Indian procurement programs or repatriate profits easily. There is no point in having 'FDI in defence' if it only ends up becoming another route to assemble semi-knocked down(SKD) or completely knocked down(CKD) kits in India under the garb of promoting indigenization as known as the Tatra model. OEMs may look to use 'FDI in defence' to simply skirt various import duties to source foreign components via the back door. Too much glib talk goes on in the media about buying 'technology' when just a 'product' is actually being bought. The idea is to bring the 'know why' behind the product and not mistake the product as the technology itself. FDI has to be leveraged to make India part of global value chains in the military industrial sphere.

    While ToT may be the chief factor being touted by the usual suspects as the raison for FDI in defence, it really isn't. The chief draw of FDI as it were is to grow the Indian eco-system for Tier-I to Tier-3 suppliers while generating employment. Essentially the idea is to use the pull of the Indian defence market to ultimately set the grounds for global export of Indian military products across the value chain. Indeed any 100 per cent FDI approvals should be dovetailed to encouraging sub-system suppliers for what are essentially domestically developed platforms and systems. India today can put together very credible platforms such as tanks, helicopter, fighters and ships. The chief gap is in terms of domestic supply of key sub-systems with the biggest challenges being in the domain of propulsion technology. It is these gaps that foreign companies can be enticed to fill with the draw of large orders, export potential and even relaxed profit repatriation norms.

    Fully owned foreign subsidiaries however cannot be allowed to bid directly for 'buy and make' (Indian) and 'make' categories of procurement in cases where credible domestic capability exists and for overall operational security purposes. Flagship indigenization programmes such as the Future Infantry Combat Vehicle (FICV) and Tactical Communication Systems (TCS) would be examples of tenders were 'Swadeshi' must be given preference.

    Such subsidiaries must also be almost fully staffed with Indian citizens since a major way in which ToT can take place from such a set-up is through diffusion and 'learning by doing'. Besides such an arrangement will also make it easier to prosecute a firm or its employees in the event that a violation of national laws takes place and this issue will become more important as India rises as a military exporter. The other method to gain ToT while allowing 100 percent FDI would be to create fully funded Centers-of-Excellence (CoE) in India for identified critical sub-system technologies. In this aspect Pratt & Whitney's (P&W) 'Turkish Engine Center' which is a joint venture between it and Turkish Technic specializing in CFM56 and V2500 engine overhaul and repair is indicative of what more India should leverage given our far greater strength. More over through the JSF program Turkey is also going to site P&W industrial facilities.

    A more direct way of ToT however would be to promote the Brahmos model wherein DRDO holds 50.5 per cent and Russia's NPOM holds 49.5 per cent. Such joint ventures (JVs) can now be envisaged across a spectrum of areas where large domestic programmes are underway. For instance, this model could conceivably be used for a next generation anti-tank missile which could be a collaboration between DRDO and America's Raytheon leveraging technology from India's Nag project and Raytheon's Javelin. Indeed as China has shown across a range of industries, JVs are the way forward once domestic industrial capabilities have crossed a certain threshold. It is here that the automatic 49 per cent route becomes important wherein large Indian majors bidding for key programmes can leverage their bargaining power for sourcing foreign technology on a case-by-case basis. It is these Indian majority stake-holding JVs that should be allowed to participate directly in the more than 150 buy and make (Indian) programmes that are in the process of being rolled out.

    In all of this it is important note, that leveraging FDI in defence requires a continuous focus on domestic R&D. No OEM in the world will part with intellectual property for the love of God or for a few dollars more. They would do so when they know that DRDO and Indian companies will ultimately succeed anyway in an area and it is better if they (i.e the foreign OEMs) can make some profits now by participating in large Indian orders via the JV route. Indian industry believes that 49 per cent via the automatic route coupled with a commitment to CoEs is adequate to bring in foreign OEMs.

    The need to boost domestic R&D budgets even while FDI in defence in being liberalized cannot be stressed enough however. Since South Korea's (ROK's) example often crops up while talking about the use of foreign investment in strategic industrial sectors, it must be observed that the Koreans have also invested heavily in domestic defence research since the 1980s and their own literature acknowledges that it is this thrust along with the diffusion of industrial innovation that has primarily helped it indigenize. ROK policy also looks closely at where 'gaps exist' in capability before entering into collaborative arrangements or allowing direct foreign participation. And ROK's achievements in naval shipbuilding and military metallurgy notwithstanding, the fact is that it still does not have any great satellite launch capability nor could it build credible ballistic missiles without clandestine Russian ToT of the Iskander system. India of course can send probes to Mars and also has multi-level domestically developed strategic deterrence systems. The point being made is that the Indian approach should recognize domestic strengths and leverage FDI in defence as part of an overall strategy for enlarging India's MIC.

    That overall strategy must include serious commitment to buying domestic in the form of very large orders. For instance if the HAL Tejas was firmly committed to in the high hundreds, it is conceivable that GE could be enticed to set up a subsidiary in India fabricating various engines for this procurement. Moreover with an assured engine sourced domestically, the HAL Tejas immediately becomes rather attractive for exports to a number of countries looking for a cheap and easy to maintain fighter. What is being illustrated is the kind of possibilities that can be opened up if there is domestic clarity on the future of the Indian defence sector. Obviously the need of the hour is to design proper export norms for Indian weapons besides setting up a defence technology commission as recommended by the Rama Rao committee. Ultimately getting the best out of 'Videshi' requires a hard core 'Swadeshi' mindset.

    For updates follow Saurav Jha on twitter @SJha1618. Send your feedback to [email protected]
     
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  3. pmaitra

    pmaitra Moderator Moderator

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    Very good thread, and a very good article.

    I am looking forward to some informed discussion on this subject.
     
  4. Zebra

    Zebra Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    Good topic though, but proper place for it is 'Defence & Strategic Issues'. This is 'Indian Air Force' section.
     
  5. Punya Pratap

    Punya Pratap Regular Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    Pmaitra I also wanted to start a discussion on pros/cons of FDI & ToT as that is going to be the focus in the near future!

    Casper I put it in the most volitile Forum i.e. Indian Air Force ;)

    Mods please shift the thread to Defence and Strategic Issues!
     
    Zebra likes this.
  6. ersakthivel

    ersakthivel Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    Seems that jha has done his homework very well.

    FDI should not be allowed as easy take over route for many small ventrues that have painstakingly built their niche know how in years of hard working with DRDO and HAL.

    ANd as long as we dont "know why" all these deep TOTs are essentially of no use in building our strength.
     
  7. Zebra

    Zebra Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    FDI in defence will help India.

    * Foreign companies can use India as their manufacturing base, at the end they gonna buy back those products anyway. But it will provide jobs to Indian people.

    * FDI in defence will reduce distance among western countries and India. As defence military establishment itself is a very sensitive matter. Co-operation in this sector will help.

    * FDI in defence will be heavily depends on Indian government's 'go ahead' certificate, so there won't be any take over issues.

    * It will reduce our dependency on weapons imports.

    * It will help to improve our local ancillary industry.
     
  8. Defcon 1

    Defcon 1 Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    These are some of the basic misconceptions I have seen with people. We should get one thing clear, the prime objective of the defence sector is not to provide jobs, it is to ensure that armament technology and production is indigenous so that the nation is not dependent on others, specially considering the fact that India is not a part of any military alliance such as NATO which can take care of our armament needs.

    Second thing that one needs to see about FDI is that it is being seen as a way of enabling domestic production of weapons. However the problem is any such domestic production will come to India not because of existence of military tech in hands of India but simply because of lower wages of India. So we are looking at a China type model everything will be produced in India, but all of that will be low tech.

    The only way to move up the technology ladder and gain access to cutting edge technology quickly is license production or JVs. Brahmos can be looked as the model project. It gave us access to the fastest cruise missile in the world and also enabled us to make investments in R&D which has now resulted in Next-Generation projects like Brahmos 2 & 3. Many of Brahmos foreign components are now replaced by Indian components. All of this has come along with the economies of scale since more than one nation is involved in this. Other similar projects are FGFA, Barak 8, Maitri, Su-30 MKI etc.

    So a logical way to move forward will be giving preference to indigenous companies in projects where capability exists and simultaneously partnering with the advanced nations to work on next generation of their weapons systems, so that our scientists can quickly start working on the frontline technologies. That has not happened enough. There still exist projects where the size of orders are big enough to bargain some of the R&D workshare as well, however still a buyer seller relationship exists in those projects. MMRCA is a clear example of this. Though no change is possible in the contract design of this project since it is at a very advanced stage, we should actively pursue such possibilities in other projects. Project 75-I can be a good candidate for this where we can get some workshare in the design of the next generation submarine that the advanced nations might be planning, while fulfilling the requirements of our navy alongside.

    The reason that it has become mandatory for us to go along this route is that, with every weapon generation, the R&D investment has gone up. NATO nations have upped the ante by pooling in their resources to create super projects like the F35. India cannot match their spending alone. We need to partner with other nations and pool in our resources if we are to come of the this import curse. China has already started doing so by starting SCO. India also needs to create a network of military alliances or join into one already existing.
     
    Last edited: Oct 11, 2014
  9. Zebra

    Zebra Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    We have to start it some where, if they are of low tech category, then also let it get start first. It is always better to get something rather than nothing.

    And I am looking at defence FDI in different way. It will give India much larger defence manufacturing capabilities. Which we don't have right now. It will help both the countries. It will help FDI company's origin country, it will be headache to maintain these much of manufacturing facilities with such financial crisis. If they switch it here at least few of them, then it will be easy for them to maintain their defence requirements (in terms of enough quantity) in such tight budget also. On other hand it will be very helpful for India as it will help us to create our own defence industries.

    Jobs are additional plus point.

    When those foreign companies come here as FDI and make JVs, then it will help their local Indian partners to get those latest technologies which they don't have right now. They may get much advanced tech or they may get less advanced tech, but still it will improve their current capabilities, that is for sure.

    Here I am not considering Indian defence forces as future customers and Indian defence PSUs as JV partners for those FDI in defence industry.



    What ever we did as of yet, it will help in future, anyway. But till date what ever we got (as far as defence technology is concern), everything comes from govt labs and govt PSUs only. So what ever defence co-operations we made with other foreign companies, they all gone to those PSUs only. And
    we look gain in it only when any Indian govt defence lab or govt defence PSUs get latest technology.

    But what if any private company also get few of new tech, does we consider as our gain?

    One more thing is important here, in those co-operations ( FGFA, Barak 8, Maitri, Su-30 MKI), Indian forces were there as buyer. And that is why Indian govt was also involved in it.

    Where as here in defence FDI, Indian govt doesn't need to get involved in it, as they won't be there as buyer. But still it will be easy for Indian govt if they want to buy something and get it made in those Indian JVs.

    Nothing wrong in this type of understanding. Let the private players manufacture something which was originally developed by our labs and PSUs in past. And when they are making it at the same time, our labs and PSUs develop future products for us.

    But all depends on govt, how far they want to go in it.


    Very hard for me to say what previous government did in those future projects for Indian defence.

    But I am sure new PM has many ideas. So lets hope for the best.
     
  10. Defcon 1

    Defcon 1 Senior Member Senior Member

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    re: Can Videshi benefit Swadeshi - FDI & ToT debate carries on!

    You don't understand it, FDI in defence won't help India in establishing their own defence industry. It will just help MNCs such as LM and BAE to move their production facilties to a low wage country. You are assuming that if high tech equipment is manufactured in India, Indian JV partners will get access to that technology. But thats not how it is going to work. Those technologies/IP will be protected by the JV contracts and thus Indian partners won't be able to use them for any purpose other than specified in the contract. For example, if LM sets up a F35 factory in India, they will do using by creating a new JV company with an Indian partner. To enable production of F35, some patents of F35 will be transferred to this new company. However, it will be mentioned in the contract that the Indian partner cannot use those patents for any purpose other than the manufacture of F35, even after the JV ends. Thats how it works.

    Private companies won't get any tech using FDI. The tech will transferred tech temporarily and will be forbidden to use it for any purpose other than what is stated in the contract. Any tech that we will get will be the most low end. Tata is manufacturing cabins for Sikorsky because it is low tech product, and US don't care about outsourcing it. High tech components are still manufactured abroad. Thats why the initial proposal for 74% and 100% FDI existed, in order to bring in genuine transfer of tech. But that would have still not solved the problem, so I am glad that it was not implemented. You see the basic problem here is it doesn't matter whether the manufacturing is in US or India, what matters is where the R&D is, which country do the scientists belong to, as that is the most value adding and critical component of the value chain. FDI in defence will actually increase India's dependence on foreign countries since it will make foreign products more competitive by giving them access to low cost manufacturing facilities of India. Our own products will die.

    Exactly, that seems to be the path taken up by the government. I only wish they would go further along this road. We need to grab more high tech JVs to catch up quickly.
     
  11. pmaitra

    pmaitra Moderator Moderator

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    Thread moved. Yes, this thread should not be restricted to Air Force.
     
  12. Zebra

    Zebra Senior Member Senior Member

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    Sir, FDI in defence will help India.

    Not only FDI in defence but even contract job work projects also helps India, for example take S-92 JV. Previously it was carried by MHI, Japan. They stopped it bcz their govt wants them concentrate on their own products. So the entire job work came to India, as Tata-Sikorsky JV. Now that company can make S-70 for India with the help of Sikorsky, if we buy it and if want them to make S-70 for India. So it proves that such contract job work projects also helps India.

    But I don't understand why you are dying to prove two different things as same. Next generation technology / products development projects and FDI in defence they are totally two different things. For god sake don't mix them up.


    May be you are not happy with FDI in defence that is why you are looking at it in negative way.

    Take it as product. Not as technology. FDI in defence is not the right tool to gain technologies, that too next generation tech.

    That is why India has its own joint development projects with others.

    In general, we need technologies and we need defence manufacturing capabilities also. At this moment, we don't have both.

    And FDI in defence won't kill local products, for example see the govt's tender for 6X6 and 8X8 trucks. They clearly mentioned in it that there are two categories, one for only Indian companies and one for foreign companies. So no need for worry at all with defence FDI.

    And FDI in defence and Indian defence procurements, they are also two different things. There are no need for Indian government to go through defence FDI JV companies only for every defence procurements. India didn't buy any S-92 helos. But still they make cabins in India.

    So I stick to my point of view, indeed FDI in defence will help India. That is fact.
     
  13. Zebra

    Zebra Senior Member Senior Member

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    Can 100% FDI Revive India�s Defence Sector?

    Aakash Brahmachari
    Defence Risk Consultant
    E-mail: [email protected]

     
  14. ishan.aggarwal.777

    ishan.aggarwal.777 New Member

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    Does any one has info on the pak fa t50?
     

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