The Indian government has rejected a proposed tie-up between EADS, the Franco-German aerospace and defence group, and Larsen & Toubro, which was aiming to tap into New Delhi’s growing defence budget.
EADS and L&T, India’s biggest private defence contractor, had planned to form a joint venture to supply electronic warfare systems, avionics and radars.
India’s Foreign Investment Promotion Board rejected the defence tie-up on the grounds that it would exceed the current defence sector cap of 26 per cent on foreign direct investment (FDI). Most sectors of India’s economy have restrictions on the level of foreign investment.
India has a five-year military procurement budget of $30bn, an all-time high, as it replaces its antiquated Soviet-era equipment, and foreign defence contractors are keen to tap the market.
Indian industry lobby groups have been pushing the Congress party-led government to raise the foreign investment in the defence sector as part of wider economic reforms.
“We have made the recommendation to the Ministry of Defence and the government of India,” said Amit Mitra, the secretary general of the Federation of Indian Chambers of Commerce and Industry, which is pushing to increase the foreign ownership limit to 49 per cent.
There is precedent with the government’s lifting caps in the telecoms sector, which has seen rapid growth in recent years, from 26 per cent to 74 per cent.
“[The defence sector] could be the next sector of massive growth, but foreign participation is necessary”, said Mr Mitra.
India’s MoD said that any decision to relax the 26 per cent cap was some way off. It will be “something that has to be decided by the MoD. We don’t have any such proposals to increase the FDI cap at the moment.”
Other foreign defence contractors have hit similar problems. The UK’s BAE Systems tested the restrictions in October when it applied for a joint venture with Mahindra & Mahindra, the Indian carmaker, to supply armoured vehicles. BAE was looking to take a 49 per cent stake. That proposal was rejected and the FIPB this week approved a revised split of 26 per cent for BAE and 74 per cent for Mahindra. The move by BAE is the first step by the defence contractor to link up with Indian partners to supply weapons systems to the armed forces.
Defence industry executives say that government foot-dragging over lifting the foreign ownership restrictions may be in response to local vested interests, in particular public sector defence groups.