100% FDI is the way to go, not 49% or 51%
Given how India has got used to taking baby steps in most areas, the buzz is the government plans to hike FDI limits in the defence sector to just 49%. Indeed, Indian industry seems to be split on the issue as well, and after first welcoming majority FDI in defence (June 10), the Confederation of Indian Industry (CII) decided to plump for 49%, reportedly after a bitter fight where well-entrenched local players like Bharat Forge and L&T argued that a majority FDI cap would hurt local industry—in its June 27 letter to the defence minister, CII finessed its stance and said it was in favour of 100% FDI in defence for 100% export purposes; for the rest, 49% was the preferred alternative.
Whatever view the government eventually takes, it has to be understood that, at the very core, there is no difference between 26% and 49%, except for the fact that foreign investors can pump in more funds if the equity cap is higher. So, if what is keeping back FDI is the lack of control over the company, then a minimum of 51% will need to be on offer. In any case, given that strong Indian manufacturing firms continue to grow even in the face of competition in most sectors, it is difficult to understand the fears of the home-grown leaders like L&T—chances are many large foreign defence equipment producers would like to tie up with it, and it is up to the firm to decide if it wishes to go ahead and become a minority partner.
From the government’s point of view, if a strong foreign supplier is to tie up with a lesser-known Indian firm which then emerges as a player to reckon with, that can only be beneficial to the country. Indeed, each sector that has seen vibrant global competition, be it automobiles or telecom, has become a lot more efficient over a period of time. That said, local industry has a point when it talks of the need for a level playing field. As this newspaper has reported, several proposals of Indian firms have been held up for years for all manner of reasons—in one case, for instance, the project was not cleared due to the fact that the Indian promoter did not have a 51% stake; in another, the hitch was the FII shareholdings in the parent company. That is, apart from the FDI limits, the defence ministry also has several other conditionalities. There is also the issue of preference given to defence PSUs, and the industry’s old complaint is that the armed forces are more keen on imported equipment, and field trials seem to stretch interminably. Fixing higher FDI limits is important, but it is only the first step.