FDI in Defence Sector

Discussion in 'Defence & Strategic Issues' started by nandu, Mar 25, 2010.

  1. nandu

    nandu Senior Member Senior Member

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    Government for 100% FDI in Defence

    NEW DELHI: In a potential policy shift of enormous significance, the Manmohan Singh-led government is considering a proposal to open up the defence manufacturing sector for 100 per cent Foreign Direct Investment (FDI) by allowing big global players to set up production facilities in the country.

    According to a note circulated within the Commerce Ministry and sent on to the Cabinet Secretariat for discussion, “established players” in the armament industry should be encouraged to set up their manufacturing facilities and integration of systems in the country by permitting 100 per cent equity through the FDI route.

    “There need not be any commitment on procurement and these enterprises would have to participate in the RFP [request for proposal] to technologically qualify and also succeed in financial bidding. In case of such firms, we should permit 100 per cent FDI under the FIPB/CCEA approval route,'' the proposal says.

    With the stated intent of cutting down the role of “touts and middlemen'' in weapons deals, the note says: “For future RPFs by the Ministry of Defence, the country could impose a condition that the successful bidder would have to set up the system integration in India with a minimum percentage of value addition. The successful bidder should be allowed to bring equity fully through the FDI route without any restriction.''

    Taking note of concern over availability or reliability of supply during war, the note says that conditions could be imposed that the Government of India has the right to expropriate a manufacturing facility in case of need for reasons of national security by paying suitable compensation.

    Concerns

    “There can be concerns about passing of the equipment, designs or source code to enemy countries. Such a possibility exists even in the case of imported equipment. In fact, in the case of indigenous equipment, we can control the production mechanism in a much better manner. The government could also reserve the right to inspect or control the production and dispatches in these facilities through deployment of necessary security agencies. Export to enemy countries could be banned through a negative list,'' it states.

    http://www.hindu.com
     
    Last edited: Mar 25, 2010
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  3. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    Precisely what was being feared is happening, first they said in some exceptions 74% fdi limit will be allowed with the standard cut off at 49% and now they are talking about 100%, good, just goes on to show how prone the MoD remains to the dictates and lures thrown around by overseas MNCs!

    There goes the so called 50% that needed to be reinvested in India and on homegrown companies out of that mmrca deal which was supposed to work well for the India aerospace industry.

    Though the few goods one can see coming out of this is the general offset clause will be increased from 30% to 50% or may be more even to the extent of even 100% which means the funds wont leave indian shores for all, with people who are employed in this sector earning much better than what they are doing right now who will have a much better chance to more r&d exposure, fdi will increase since these companies will like to make use of the cost benefit india will provide to their products and they could move their manufacturing units for most products even if india were not to be interested in their procurement, the exports will shoot up big time with India becoming a big name in defence industry and in here there wont be any competition since China can not compete with us on getting this fdi and exports, and yes the most important, the big chink of products will carry a tag of “Made in India” which will suffice to the concept of homegrown.

    But in all this where will the real homegrown industry end up will be anyone’s guess, the little scope of JVs for our companies and the process of shortening the learning curve all goes down the drain.

    A dream called indigenous industry for Indian defence needs, what a waste, and if this what they wanted to do in the end then why did they wait for 6years, they could have done the same when UPA-I was formed.
     
  4. Yusuf

    Yusuf GUARDIAN Administrator

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    Wait a minute. How will indian defense industry grow? How will they learn? I don't think this will go through. We need joint ventures. Not 100% fdi. I am sure even congress allies will oppose..
     
  5. Daredevil

    Daredevil On Vacation! Administrator

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    GoI should be mad to allow 100% FDI. It should only allow not more than 49% FDI, otherwise the global companies will come to India only for cheap manufacturing and not to share their technology. FDI percent can be increase over the time, may be 10-15 years, which will give enough room for the domestic players to catch up on the technology and compete with global companies.

    We can trust our communist parties to do the needful. BJP is not at all playing the proper role of a good opposition.
     
  6. ajtr

    ajtr Veteran Member Veteran Member

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    cross-posting from Agriculture thread.this news item fits the bill here as it was in agriculture thread.

    India up for sale to MNCs

     
  7. gogbot

    gogbot Regular Member

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    Now i know what you all may be thinking, this will doom our domestic private sector, our strategic integrity will be compromised.

    But you know what, they said the same thing in 1991 , when MMS proposed his economic reforms. Look at where India is today a result.

    Not the same thing you may ask. But yes it is i will say.

    The lack of FDI investment in the nation's defence sector has been one of key reasons why our own private sector has not got of the ground, with major projects. They are not big enough by them selves to compete with Big shots like DRDO and HAL

    This increase FDI in defence manufacturing will for one thing lower the price of our imports, it will increase JV with Indian private firms.
    It will create new growth in slow growing sector. Private firms will get stronger though this deal, as 50-50 JV is now possible when foreign companies want to meet their offsets.

    They dont want to pay full for manufacturing plant in India that could one day be confiscated, then again they want ownership and control over they technology and products. This lets them have that.

    Now Don't think the GOI will just open the gates and walk away, they will be the watchmen
    Companies can invest as much as they want in their own companies. But they are doing so in India.
    Would SAAB want to build manufacturing plant and manage it full time, no. They will take an Indian partner and then work with them while maintained a 50% or greater holding in the investment. It looks a lot better on their balance sheets and Investment in manufacturing systems in India, looks like a more appealing option.

    What if the F-18 is picked for the MMRCA and Boeing setting up its Plant with TATA in a JV.
    decides making the Jet in India is cheaper, and since they own a plan In India, lets produce more.
    Production line stays open TATA makes more money, and one day can fund its won R&D projects on a large scale.

    If there is a constant stream of Profits, then it warrants investment, we have to make TATA and other companies invest more in Defence, A catalyst for this is letting foreign Companies get it

    Look at it this way, Our R&D still stays in India,

    Our strategic assets are not compromised.

    Our PSU's still provide a solid backbone to build one.

    The government still have to approve investments or Buy-outs as well as tenders so our private companies are safe.
    ---------------------------------------------------------------------------------------------------------------------------------------------

    My thoughts do you think what i am saying is feasible
     
  8. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    BT brinjal was a disaster and thankfully the people along with NGOs stood up to it else people would be freely using poison only to see disaster at some stage of their lives with organ failures becoming a norm with generations suffering for a long time to come of course in the process giving a boost to the pharmaceutical industry, the insurance industry and to the health care industry other than the BT industry.

    gogbot,

    1 back in 1990 india had a decent private sector who ever decently good in what they did because of the license raj or better known as a quota system so there remained a built-up infrastructure which was cashed on at a later stage when Indian economy opened up. The TATA’s, the reliance’s that we see as global giants remain the babies of that era who were quick to adapt to the changes, who had enough clout over the government to change their policies to further their interests, today a mukesh ambani literally runs the GoI. Other than a odd L&T there is hardly anyone to make use of this change in policy, yes there will come a time for 100%fdi but that has or should have atleast another decade or decade and a half to it, just as pointed out by DD.

    2 indian companies made a mark in IT, telecom (the wireless) and other such industries since these industries to start with were restricted to Indians per se, and lot of these industries came up to their being in the 90s and luckily for these industries they had a phenomenal run in the 90s. take the banking industry, highly restricted even today a good 20years post when Indian economy was first liberalized. Insurance industry not any different, take any industry and we have some sort of restrictions , guess India is still largely seen as a closed economy a cause of irritant to the outside world but in the process we have helped our homegrown industry in a big way, now can the same be said about out defence industry where we hardly have any expertise in the private set up.

    3 with 100% fdi where is the need of a JV, and if a company is coming up with thousands of crores of investments then they will not look for local partners, this is no fmcg industry where people make small time investments and then look for roi to take full charge something even done by the best known names, or its too much of dilusion of power at such high investments a risk rarely taken, yes a few exceptions will remain as is seen in the auto industry but then the history of Indian auto industry since 1990 was one where 100% fdi was not allowed which again helped create M&M, Kirloskars, and many such companies.

    And seriously if this is what the government wanted to do in the end then why did they waste 6 years on some wishful thinking which was never to materialize.

    Mind you these companies, ie the little known smaller ones will not be gobbled up as a takeover bid since they really offer no enhancement to the existing expertise or product profile of these MNCs, but what will happen is these smaller ones will be out thrown since they will not be able to match the cost at which these larger MNCs will place their product line and this will mean a lot of potential good players killed or their journey to the top made that much more difficult.
     
  9. nandu

    nandu Senior Member Senior Member

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    100% foreign direct investment in defence is bizzare says the defence minstry

    New Delhi: The ministry of defence has called a proposal by the commerce ministry to permit 100% foreign direct investment (FDI) in defence “bizarre”.

    The commerce ministry, in a note sent to the cabinet secretariat, has suggested that global defence firms be permitted to set up manufacturing units in India with 100% FDI. As of now, India allows a maximum of 26% FDI in defence sector.

    “There need not be any commitment on procurement and these enterprises would have to participate in the RFP [request for proposal] to qualify for financial bidding. In case of such firms, we should permit 100% FDI under FIPB/CCEA approval,” the note says.

    According to the commerce ministry, the move would reduce the role of illegal arms agents.

    “For future RFPs, the country could impose a condition that the successful bidder set up system integration in India. The successful bidder should be allowed to bring equity through FDI,” the note says.

    “There can be concerns about passing of equipment or designs to enemy countries. This possibility exists even in case of imported equipment. In case of indigenous equipment, we can control production better,” the note says.

    Defence ministry officials said such a move would not be accepted. A senior private sector official said the proposal has no “validity” without MoD approval.

    http://www.dnaindia.com
     
  10. gogbot

    gogbot Regular Member

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    ^^^^^^^^^^^^^^^^^^^^^^

    well the FDI still needs to be raised to 49% .

    Almost all the players want an increase in the FDI .

    --------------------------------------------------------------


    Also the fact that it was in fact the commerce Ministry that wanted the 100% FDI, shows that this was just a bunch of economists and accountants proposing policy.

    The MoD was not involved in that statement or proposal.

    So you all you MMS and UPA bashers can take a break.
     
    Last edited: Mar 26, 2010
  11. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    You think private Indian industry will be able to compete when bigshots like Thales, BAE, Boeing, EADS, Finmeccanica, MBDA, Raytheon, Lockheed and the rest start setting up shop in India? HAL and DRDO are nothing compared to these companies.

    This FDI will be directed for the purposes of what is going to make these foreign companies money, not the development of private Indian firms. Foreign doesn't want private competition so they are going to drown out Indian companies. Indian JVs aren't 50-50 cooperation, it is India paying money for technology these companies already have and very little of the know-how is sent to Indian hands. Industrial offsets can go anywhere, it doesn't even have to be in the defence sector.

    Exactly why they are coming, they want cheap Indian labour to outsource components while the IP and core R&D stays back in their home countries. India is just being used as an outsource centre. It is good for Indian jobs but doesn't advance India. It actually strangles Indian MIC. No way these private or even state-owned firms can compete with the quality, sophistication that is coming with Western companies.

    I will tell you what is going to happen as has happened in many Western countries. These global giants are going to come into India and buy up all these private companies that show the slightest innovation and just build a new empire in India. That is how multinational giants become gaints and India will only expand there hold.

    Why Boeing would partner with TATA for aviation is beyond me, but I will tell you the scenerio. With the FDI cap lifted to 100%, this gives Boeing carte blanche to buy the majority stake in whatever company it partners with. Or Boeing can build their own facility. Indian company no longer is India, it is Boeing. India just gave up control of their defence industry.

    If there is a constant stream of profits and TATA and Lahindra are making them, Western companies will buy controlling stocks of TATA and Lahindra and steal it from India.

    You won't have any R&D, it will be owned by the West who is selling you their R&D which is far superior.

    Your assets will be foreign owned.

    The lifting to 100% FDI means the government is giving carte blanche for Western takeover.

    No, once you give free reign to foreign companies to come in, they will take over your domestic industry and buy up anything in their way. Jobs stay in India, but the profits and development go outside.
     
    Rage likes this.
  12. gogbot

    gogbot Regular Member

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    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

    You know , since the ministry of Defence in India has said no to a 100% FDI, i don't feel the need to argue most of the finer points i presented.
    I merely tried to provide another outlook.

    But you and I both made assumptions making our statements.

    Me for example , assumed that the Private sector was competent , as well as the Government .
    That means Private sector buy-outs have to approved, India private sector can leverage their position with the government to secure tenders.

    You are assuming , Indian companies will just let themselves be bought out, and that the government wont do its bid to protect its own domestic sector.
    Also You make the assumptions that India would just buy foreign weapons systems.


    But two points you made were very wrong.

    India still has a number of DPSU , DRDO and its group of merry inverters. They do the bulk of R&D for defence in India anyway.
    They are not going any where. If anything competitive increases for them .

    Strategic assets refers to our Thermo Nuclear warheads and their delivery systems, meaning our missiles, Anti Missiles, Nuclear submarines , even aircraft carriers etc


    The big important stuff, will all be worked on By Indian companies, Primarily DRDO and other DPSU's.

    That wont change unless there is a strong Indian defence private sector.

    So the backbone on which all of India's capabilities are built will always be on them.

    100% FDI or not, that wont change.

    But you made some very good points , and i also share some for your apprehensions,

    But its not as simple as you make it out to seem. I refuse MNC's cant just roll in and start calling the shots.
    The Market leader will always be DPSU's . MNC's that wont work with India's companies may in fact be dis-advantaging themselves from Deals.
     
    Last edited: Mar 27, 2010
  13. Singh

    Singh Phat Cat Administrator

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    The current 26% limit resulted in a net FDI inflow of 70lac Rupees that is approx 150,000$ yes 150,000$ in the last 1 decade.
     
  14. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    It doesn't matter what DefMin says. India is a democracy and the Parliament makes the decisions. DefMin will do what they are told or they will be replaced.

    According to the proposal, 100% equity means 100%. They won't be protected.


    If Western companies are coming in and offer defence products made in India, DRDO and DPSU will become obsolete. India will just buy from the West.

    Strategic assets refers to strategic industrial assets. They will be foreign owned.

    If the only thing DRDO and DPSU is relagated to is nuclear development and delievery, they won't even matter since they can't export anything. Small number of capabilities they will be, India will still be foreign owned. Ordinance Factory will be producing Western weapons with Western patents.

    But it really is that simple. I have watched for years as European manufacturers are bought out by the giants like Thales, BAE, Finmeccanica and the like killing any other competition. Little countries don't have a chance to grow a major defence company because the big ones buy them out when they start to make a mark. It is the same in the US. When anything gets in LockMarts way they just buy it out. 100% FDI means foreign companies can own 100% equity of their ventures = End of Indian companies...
     
  15. thakur_ritesh

    thakur_ritesh Administrator Administrator

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    paaji,

    for that one needs to look at the reason why such a thing happened.

    was there a need to bring in fdi when the GoI/MoD were too happy to source directly from the foreign vendor with no need for that vendor to invest in india. he then had no incentive to do it either, even today other than low cost manufacturing which helps in increase the over all profits he has no other real incentive since the management control remains in the hands of the Indian partner, but with the offset clause that was forced on them and will make sure that even at 26% (which hardly gives them any leverage) they make their investments in india, but then for now our defence industry remains at a rather nascent stage and the base rather small so they are talking about raising it to 49% so that atleast the amount being reinvested can be absorbed or the concept of offset clause comes as failure, which will happen with the entry of bigger players like TATA, Godrej, etc, but this will also make sure the base of local sourcing increases many fold and that is where the potential of developing local industry comes to the fore because there will emerge certain dedicated players who will just focus on one line of business for sometime to come and one can hope we can make the bharti’s (the telecom co) in this sector as well.

    what we are seeing for now is a forced measure taken to build the domestic industry, and being protectionist isn’t always bad. if we make it 100% fdi, then lets forget about having strong domestic companies in the business than the usual TATA’s, Godrej’s, L&T’s etc who anyways are found every where, and in the end if it is about increasing the profits of a limited few corporate houses then this whole exercise is a sham. it is good atleast some sense prevailed and the 100% fdi proposal got rejected, and this is the only reason why i appreciate our raksha mantri, who other wise has a very poor track record.
     
  16. gogbot

    gogbot Regular Member

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    On that same logic is should not matter what the commerce ministry says either.

    Don't be so single minded.

    Who will the Parliament take advice on defence related matters from the Defence Ministry or the Finance Ministry.

    The fact that there has been no FDI increase from 29% despite calls from various groups to go for 49% shows you , the government really has no interest in raising the cap as of now.

    Now i know you are trying to give us the benefit of what happened in Europe , but the situation is slightly difference in India.
    While i cant speak for India's Private Companies. which are in their own rights some MNC , which are heavily protected by the government.
    And run by some of the most richest men in the world.

    India's DPSU's will always continue to play a crucial role in the nations defence systems. That is one Pillar that the entire Indian defence complex is built on.
    It recruits from some of the best and brightest in the nation.

    You will have to forgive if i defer to your claims on its obsolescence.

    Even in a private sector defence complex of India , DRDO will still continue to play a critical role
     
  17. Armand2REP

    Armand2REP CHINI EXPERT Veteran Member

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    The FinMin obviously. They cancelled the tanker contract when DefMin already made the decision.

    If the ministry gets its way, there will be. Dr Singh apparently supports it since it is his cabinet.

    India is like any country, and in some cases more so... babus. People follow the money and these Western companies will bring it.

    Sure, that is why the Army has to send RFPs for the most basic of infantry equipment. The writing is on the wall.

    DRDO can't compete with the best of the West. It will be relegated to a micro-player in Indian MIC.
     
  18. nandu

    nandu Senior Member Senior Member

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    Govt mulls FDI hike in defence production: Sharma

    The government today said it is weighing pros and cons of raising the FDI limit in defence production with a long-term objective of making India a major player in the sector.
    Confirming that "there are discussions" in this regard, Commerce and Industry Minister Anand Sharma at an Assocham function said here that the government is looking at the "long-term interest in ensuring that India has technologies and becomes a major manufacturing place(for Defence).

    He said before a decision is taken the "sensitivities" of the defence establishment would be taken on board.

    Different ministries, including the Ministry of Defence and the Ministry of Finance, the Department of Industrial Policy and Promotion as also the Planning Commission are debating the issue.

    India permits 26 per cent foreign direct investment (FDI) in the defence manufacturing, an area of growing interest for the domestic private sector, which is demanding 100 per cent FDI.

    Major industrial houses like Larsen and Toubro, the Tatas, the Mahindras and Punj Lloyds are already engaged into different defence-related businesses.

    Of the total defence allocations of Rs 1,47,344 crore for 2010-11, a large chunk of Rs 60,000 crore has been earmarked for capital expenditure.

    While the country has large domestic defence manufacturing base, mainly in the government sector, the government sources equipment worth Rs 30,000-35,000 crore for the world's second largest 1.5 million strong force.

    http://www.business-standard.com/in...di-hike-in-defence-production-sharma/90352/on
     
  19. nandu

    nandu Senior Member Senior Member

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    No cap on FDI in defence

    India, the defence industry has gained opprobrium as the laggard that missed out on the economic liberalisation initiated in 1991. Other sectors benefited from the synergy through collaborations, joint ventures and even the direct presence of large foreign companies. In contrast, the defence sector continued to be the sole preserve of the public sector undertakings stymieing its growth. It was only in 2001 that the defence sector was opened up to private players and foreign companies were allowed FDI to the extent of 26 per cent. But almost nine years on, these steps have not yielded the desired result. Even today, around 70 per cent of India’s military requirements are imported while defence budgets continue to rise. (The only area in which India has made significant headway is in warship building; thanks to the prescient step taken by the navy to create a design cell as early as in 1962).

    India’s defence allocation under the capital head (around 80 per cent for purchase of equipment and balance for works etc) for 2010-’11 is Rs 60,000 crore. It is expected to grow at the rate of 10 per cent per year (according to the growth projected by the XIII Finance Commission). This would imply that in the next five years we would spend a total of around Rs 2,25,644 crore (nearly $50 billion) on imports.

    Now the moot question is if an innovative, robust and sustainable indigenous defence industry could be built by lifting the cap on FDI. The question of enhancing the FDI limit in defence was debated in a well-attended conference on Defence Offsets that was held at the Institute for Defence Studies and Analyses (IDSA) in October 2008. During the conference, a strong pitch was made for allowing even 100 per cent FDI in the sector. The majority was, however, only in favour of an upward revision in the FDI limit and there was no consensus on what the ceiling on FDI should be.

    The government had fixed the upper limit of 26 per cent with a purpose. A minimum of more than 25 per cent shareholding is required to block the passage of any special resolution in a company as a two-thirds majority (75 per cent) is the least that is required for making fundamental changes in the entity; for amending the Memorandum of Association and Articles of Association for instance. Therefore, the government, by allowing 26 per cent FDI, gave potential investors the comfort that no far reaching changes can be made in the company against their wishes. But it is below the 50 per cent plus the ‘golden’ share required for the passage of resolutions like those for the election, removal and remuneration of directors. These limitations may explain the reluctance of the foreign firms to bring in technology and make large investments, as with the ceiling of 26 per cent, they are neither assured of control of the management of the company nor of adequate returns on their investment.

    In view of the lack of interest among large foreign defence entities to invest in India, the government should take into consideration the peculiar nature of the military industry while deciding on the FDI limits. First, it is the most complex of industries. Companies have to continuously make heavy investments in R&D to even survive. Second, the market for defence equipment is small on account of their high costs. Hence the cost of defence equipment would have to be amortised on small volumes. Third, governments carefully control the kind of equipment that is sold to foreign countries. Fourth, companies are fettered by the technology control regime imposed by owner nations that closely regulate the establishment of any defence industry outside their territories.

    Given this reality, there has to be a strong incentivising policy to attract foreign defence companies to invest in India. It should focus on the two mantras — giving the investing companies control over the entities they create through larger shareholding and through it, higher return on investments. For this purpose, the cap on FDI should be lifted. Depending on the kind of technology that is envisaged to be brought in and the investments to be made, the percentage of permissible FDI could vary. For investments in critical areas, even 100 per cent FDI should be allowed.

    It cannot hurt India. When companies set up base in India, there would be a diffusion of technology to supporting ancillary and auxiliary units given especially India’s expanding knowledge society. (The development of the automobile sector in India followed this path). There need be no fear either of increased FDI destroying the domestic industry as we have none worth its name in the country at present in the private sector.

    The abolition of FDI limit would outweigh any such perceived drawbacks as also bring additional benefits. Most importantly, foreign companies could determine the extent of the FDI they could make depending on the technology they plan to induct to make a success of their venture. It could dissolve the stubborn resistance to the transfer of high-end technology as foreign companies can establish a wholly owned subsidiary or a joint venture entity without the fear of their intellectual property falling into the hands of firms that could create ‘effective competition’ to the transferor. In course of time, the collaborating or parent company may take advantage of the cheap factors of production in the country and outsource components form its subsidiary or joint venture.

    As offset banking has now been introduced, the company set up in India could accumulate credits to discharge their future offset obligations creating a stake in the success of their project. Further, when high investments are made, such companies would have an incentive in continuing operations in India whose market for defence equipment is projected to grow substantially.

    One of the fears that have been expressed by some Indian companies is that lifting the cap on FDI could result in take over of Indian companies by foreign entities. While the fear is genuine, the same can be prevented if takeovers are subject to prior permission of the government.

    Abolition of the cap on defence industry should also be accompanied by a slew of other enablers, the conjunction of which would lure foreign defence companies. Companies that invest in identified areas to fill critical defence gaps for instance, should also be assured of repeat orders for a long period of time of a decade or so. It could be made contingent on the company making periodical upgrades in the product, to be eligible for such orders. Combine it with multipliers (giving higher value) in the defence offset policy in critical sectors and we would have found some good answers to our problem of building a strong indigenous defence industry.

    http://expressbuzz.com/opinion/op-ed/no-cap-on-fdi-in-defence/163424.html
     
  20. hit&run

    hit&run Elite Member Elite Member

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  21. gogbot

    gogbot Regular Member

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    Well this is what i said more or less.

    Its good consideration but by no means a guarantee.

    They keep thinking that DRDO and other DPSU's would just disappear.
    But that's never going to happen. DRDO gets it funding from the PM .

    the DPSU's are companies as well, given a chance to compete they can also be competitive.

    DRDO and its DPSU are too big to fail
     

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