India’s Defense Budget Raises Foreign Ownership Limit

AIN DEFENSE PERSPECTIVE » JULY 11, 2014

by  NEELAM MATHEWS

India's Finance and Defense Minister, Arun Jaitley, delivered the country's defense budget on July 10. Overall it is bigger, but the air force allocation has shrunk.

July 11, 2014, 7:25 AM

Foreign companies can now own 49 percent of Indian defense companies, following a change announced as part of the country’s budget statement on July 10. The budget was presented by Finance and Defense Minister Arun Jaitley, a member of the newly elected government. It includes an allocation of $38.17 billion for defense, a gain of 12.44 percent. Some $15.76 billion of this (up from $13.15 billion last year) is capital expenditure, used primarily for procurement.

The increase in foreign direct investment (FDI) prompted mixed reactions from the industry.

“The budget is disappointing; 49 percent is unlikely to get significant flows, as industry partners in high-tech are not willing to take a minority stake,” Sanjay Kumar, CEO of Paris-based technology consultancy Altran India, told AIN. A majority equity could assist indigenization of defense manufacturing, a nascent industry, to fulfill the aspiration of a government aiming at high-tech products, Kumar added. “Multinationals are hungry to come to India, given its high skills base. Without 100-percent FDI you will continue to be in the stranglehold of arms dealers.”

However, foreign companies might yet be able to exercise greater control via some sort of proxy ownership of the 51-percent balance.“The previous policy required 51 percent to be held by one resident Indian entity; it would be interesting to note what, if anything, is changed in that,” said Rahul Gangal, principal, Roland Berger Strategy Consultants. “An expansion in the defense budget is a necessity to address serious capital equipment shortage,” he added.

MaxAerospace managing director Bharat Malkani expressed a contrary view of the change in FDI. It was a question of sovereignty, he told AIN . “We think 26-percent FDI was enough,” he said, demonstrating the conflict between foreign OEMs and Indian companies hesitant to see overseas companies enter the Indian market.

Despite the overall gains in the defense budget, the air force budget has shrunk. A report by Ernst & Young expressed concern about the service’s ability to start planned new procurement programs in 2014-15. These include aerial tankers, attack and transport helicopters, and the modern multi-role combat aircraft (MMRCA). The Ministry of Defense will need to make a down payment of up to 15 percent of the contract value on signing of the MMRCA contract with Dassault Aviation, if it decides to go ahead with the acquisition this year, the report adds.