Viv S wrote:The reference to US policies was with regard to security issues(which the Americans are notoriously twitchy about) not with regard to scale or composition of their defence industry. Penetrating the US market is obviously not a feasible idea today.
Clearly you didnt get the point so let me restate. Foreign owned 100% subsidiaries will be subject to far more stringent laws & regulations of the parent organization viz country of origin, whereas the offsets program allows for technology transfer but to an independent indian partner. The scale and depth were relevant points as they show why the US does not care if a 100% FDI clause exists. Very few companies can even contemplate becoming large players in the US defence space. Such is not the case with us, where there is a delicate balance between the public and smaller private companies, and the larger private companies simply do not have the capabilties to replace the other parts of the ecosystem.
In retrospect I should have used a different example. The point was that technologies or systems that are critical from security/sensitivity perspective can be undertaken by govt. organisation while leaving the basics to the private sector.
You seem to be have some misapprehensions here. All this basic and critical stuff is made up by the media and so called committees who have not done any sort of detailed look into the issue, and repeat useless jargon as truth.
There is no basic and no critical business when it comes to many current systems, bar some technologies being developed in the life sciences spectrum (food packets etc). The sensitive technologies and systems that are being made use many of the same partners that the basic ones do. And the development of the entire industry was meant to be achieved via offsets, which this 100% FDI lunacy clearly targeted.
The level of ToT required is usually specified independent of the offset value. The current system of off-sets doesn't help India progress beyond a low cost manufacturing base either.
Let us not have argument for the sake of argument, kindly read the link provided and what the clear aims were vis a vis TOT and offsets. The current system of offsets helps India substantially, as it strengthens local manufacturing capabilities and gives them access to a huge defence market, while keeping management control inhouse.
There are also specific examples, but it does not help us to publicize them.
The current stringent system of offsets is why lobbying is being done to remove it.
The defence capabilities built up are still vastly inadequate requiring the finance ministry to expend $50 billion+ in forex over the next few years.
This is an irrelevant point. The entire point of offsets is to move India beyond the inadequate capabilities matrix. And then you state that it is required to ditch the same since India has inadequate capabilities and that too when the offsets method has just begun delivering results.
Forex is also a red herring. Go through the DPP in detail and you will realise the number of options available to the MOD to structure acquisitions as it sees fit. They can be slotted according to various categories, and 30% offsets are standard for any foreign acquisitions of Rs 300 crore and above. For those programs with a pure forex outflow, India gets 30-50% back as business for its local industry which is a fair trade, considering the investments and technology transfer the offsets provider usually has to undertake to integrate the local partner into its supply chain.
$ 50 billion spent in next few years is also ridiculous marketing hype trumpeted by the media, usually made up on basis of back of envelope estimates, looking at current equipment and simplistically assuming all need to be replaced and will be. At current rates of capex, the numbers are likely to refer to entire decade, and a substantial portion of that money will go to programs with DPP - "Buy and Make" category, where local production is part of the deal.
Even with 100% FDI, the so called defence capabilities that are built up will be Indian in name only and be restricted to the minimum technology which the manufacturer abroad will transfer while keeping core capabilities inhouse. These companies thanks to current restrictions cannot assist Indian programs either, many of which are promptly classified as dual use.
This is the reason the MOD has called this proposal bizarre.
Will the existing offsets program do more than allow domestic firms to do more than back-end for their international partners? Allowing foreign companies to set shop in India will allow a greater re-investment into the domestic economy. Also tie-ups with existing Indian firms will still happen, though out of a commercial necessity rather then a contractual obligation.
Regarding the first point, yes they will. They lead to improvement in manufacturing capabilities and investment across several functional areas to bring their Indian partners upto scratch. That improvement can be then leveraged by the Indian company for growing its business.
The biggest advantage of current offsets program is that it breaks chain of "seasonality" by allowing company to remain viable by executing offsets contracts, while it await orders for long in gestation indian products which are usually subjected by indian armed forces to endless trials.
Your second point is mistaken. Allowing these companies to set up shop in a 100% manner, and retaining full management control, only ensures that they transfer non core activities to India, and their tieups with Indian firms will no longer be a necessity as they will have complete autonomy in their respective functional organizations.
Let us not be under the mistaken impression that tie-ups with existing Indian firms are liked by system houses abroad. Majority are being pursued primarily because of the offsets clause, and to meet DPP requirements of local manufacture. With 100% FDI, the need for an Indian partner recedes substantially.
Larger Indian firms have to financial muscle to buy out these smaller companies. If they haven't its unlikely foreign firms would gobble them up.
With this one statement, you have shown that you are unaware of the Indian industry development in this sector. Most Indian firms are still playing a wait and watch game in this sector, and will not invest in the SME space as it implies long lead times to recognize revenue and lower margins thanks to extensive R&D spend as percentage of (limited) turnover. Their investments generally go to setting up greenfield production facility with technology provided by foreign partner, which has won or is expected to win a production order. Even this would not be available to local manufacturer if 100% FDI goes through, as the manufacturer from abroad would prefer to keep even process technologies inhouse and set up own unit, at best with minority stakeholding from local unit or investment agency.
However, it is the SME space that is highly vulnerable to foreign providers for whom these SMEs and their capabilities come cheap. By acquiring them, they can also maintain a lock on what the company then does with Indian organizations such as ISRO, which have at best managed to develop a handful of core partners in each critical capability area.
Yes the US would like India to open up its defence industry to make to easier to invest. Its a recurring demand not just by US companies and not just with regard to the defence sector.
Of course several countries want the clause to be scrapped why would they after years of denying India technology via methods such as MTCR, now be happy about having to transfer the same via TOT and offset programs.
They would rather set up 100% owned organizations in India and make sure these organizations are steered away from current and future Indian programs.
Acquiring critical Indian companies, and making sure that by being in India they get treated same as local vendors, they can have the cake of technology denial and eat it too (by having business).
That does not mean however that India should just agree to such proposals.
The interesting part is the proposal was made by the commerce ministry. The CII too has called for hiking the FDI permit. Indian companies don't seem to think they'll get stamped out.
The CII has not asked for 100% FDI but 49%, which is a different thing. The CII is also generally considered to be representative of the needs of larger organizations, and what happens in the critical SME space is different.
It was this same reason that led to the abeyance of plan to make larger pvt engineering groups pvt sector equivalents to the MOD ratnas. This only shows that what the CII says is not necessarily the entire picture.
If CII is what you believe in then consider what they have said about the offsets program:
http://machinist.in/index.php?option=co ... 3&Itemid=2
And yes, I did point out that it came via the commerce ministry. Such trial balloons invariably float in from all sorts of quarters citing all sorts of reasons, which was my point.
As was also that more attempts will be made to kill the offsets clause as it is stringent and unabashedly in support of Indian strategic interest.
It is also interesting to see how such a stupid, and dangerous proposal got quick traction in the media.
