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India plans to raise foreign ownership in military ventures

Draft Defence Production Policy seeks to turn India into production hub

Indian government is seeking to transform the defense sector with share sales of several state-owned defense companies, including Hindustan Aeronautics.   © Reuters

NEW DELHI (NewsRise)--India plans to let overseas companies own bigger stakes in defense joint ventures in a renewed push to draw more foreign investment and turn into a global production hub for military hardware.

The world's largest arms importer also plans to encourage greater private sector participation in its defense industry, dominated by state-run companies and plagued by long delays in product development.

The draft Defence Production Policy 2018, unveiled Thursday, has set an ambitious aim of a more than threefold jump in defense industry revenue to 1.7 trillion rupees ($26 billion) by 2025. By then, it expects the defense industry in the South Asian country to rank amongst the top five globally.

"(Foreign Direct Investment) up to 74% under automatic route will be allowed in niche technology areas," according to the draft policy. The defense ministry, which prepared the draft, has sought comments until the end of March. The policy has to be approved by the federal cabinet before it is implemented.

Analysts said India's grand goals are challenging, and can only be achieved if the government has a long-term, dedicated strategy toward fostering a local defense industry with active participation of private companies and replacing its archaic procurement policies.

"India's objectives sound similar to those of South Korea and Turkey which also want to develop their own defense industries. Reality is, there is not room for everybody up there (in the top five)," said Guy Anderson, a London-based defense industry analyst at Jane's by market researcher IHS Markit.

India was the world's largest arms importer in the four years through 2017, making up 12% of globally traded arms, according to the Stockholm International Peace Research Institute, or SIPRI, which tracks global arms sales. "The tensions between India, on the one side, and Pakistan and China, on the other, are fuelling India's growing demand for major weapons, which it remains unable to produce itself," said Siemon Wezeman, senior researcher at SIPRI.

India has over the years purchased billions of dollars of military hardware including fighter jets, warships, aircraft and missiles from its biggest supplier, Russia, as well from the United States, France and Israel. The country has been trying to modernize its military to narrow the gap with its belligerent neighbor, China, as well as long-time rival, Pakistan.

According to the draft policy, the government plans to pursue selling smaller stakes in state-run defense enterprises and engage more actively with the private industry to exploit the opportunities in the defense sector.

Anderson said "India has enormous untapped potential in terms of human capital and capacities". But private sector in the defense industry "is still in its infancy" as state-owned companies still receive most arms deals due to factors such as national security concerns.

To attract more private companies, especially small and medium ones, the Indian government in 2016 liberalised rules allowing foreign companies to hold stakes of up 49% under the automatic route in defense ventures. The limit can be raised to 100% ownership, after obtaining government approval, if it results in inflow of modern technology.

Despite the easing of FDI norms, the defense sector has been a laggard in attracting foreign investment, because global manufacturers weren't willing to share intellectual property with an Indian partner without management control.

India's defense industry received $5.12 million in foreign direct investment during April 2002 to December 2017, according to government data. In comparison, the services sector and telecommunications industry each attracted $64 billion and $30 billion, respectively.

Meanwhile, Prime Minister Narendra Modi government's ambitious plan unveiled in 2014 to spend $250 billion on modernizing the military is slow to take off due to strict procurement rules, prolonged delays and red-tapism.

The government is now seeking to transform the sector with share sales of several state-owned defense companies, including Hindustan Aeronautics and Bharat Dynamics. Last year, Cochin Shipyard, the largest state-run shipyard in terms of dock capacity, listed its shares on the Indian exchanges at a 20% premium after its $225 million IPO was lapped up by investors.

According to the draft policy, India will aim to grow its arms exports to 350 billion rupees, and create up to three million new jobs.

"India has become one of the largest importers of defense goods and services in the world. This needs to change," according to draft policy.

To reduce reliance on imported arms, the draft policy is aiming for India to become a production base for various defense products such as fighter jets, medium lift and light utility helicopters, warships, missile systems, land combat vehicles, surveillance systems and electronic warfare systems.

It seeks to make it easier for defense companies to do business, especially small and mid-sized companies, and new defense suppliers. It also aims to liberalise the licensing process for defense industries by reducing the number of items requiring a license, and also rationalise the existing tax structure.

To boost the performance of state-run defense companies, the draft policy plans infusion of new technology and machines to allow them to upgrade into making more advanced weapons. Such companies will also be professionalised to make them more competitive, while the government will also explore acquiring new technologies through mergers and acquisitions globally.

--Santanu Choudhury

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