IAF Officer Calls for More Foreign Investment in Defense.

NEW DELHI—A senior Indian Air Force officer Wednesday called for higher foreign direct investment limits in defense companies to speed up the development of cutting-edge weapons and boost exports.

Air Marshal P.P. Reddy said raising the cap on foreign direct investment is necessary because the air force alone has plans to spend about $150 billion in the next 15 years for various projects, including acquiring new aircraft. Without more investment in domestic capacity, the bulk of those needs would have to be met with imports, he said.

"This [lack of private participation] has been aggravated by the fact that FDI hasn't been permitted in the defense sector until 2001 and now we permit 26% [ownership], which I don't think is attractive to the foreign industry," said Mr. Reddy, who is director general for inspection and safety at the air force.

"Why this restriction? We need to ponder over this. Because, in countries like the U.S. and U.K., there are wholly owned subsidiaries of [companies of] other countries," he said.

Mr. Reddy is the latest prominent figure in India asking for lifting of the cap on foreign investment limit in the defense industry. Anand Sharma, India's commerce and industry minister, and Arvind Mayaram, economic affairs secretary, have asked for a similar step earlier this year.

The commerce ministry in 2010 said India should consider raising the ownership limit to 74% as it would encourage the transfer of proprietary technology to India, bring in funds and boost exports. But the proposal wasn't taken up.

The defense ministry has opposed increasing the foreign direct investment limit, questioning if it really would result in the transfer of technical know-how, and raising concerns about foreign companies stopping production in India in times of war.

The status quo in the defense sector comes amid changes in the foreign direct investment limit in other sectors such as telecommunications, retail and aviation.

India is the world's largest defense importer, with an average annual budget of more than $30 billion. The south Asian nation, however, imports about 70% of its defense equipment such as fighter jets, missiles, radars and helicopters from countries such as Russia, U.S., France and Israel.

Data issued by the commerce ministry in August showed that India attracted foreign direct investment totaling a meager 24.12 million rupees ($3.9 million) from April 2010 through May 2013. The figure compares with nearly 4.06 trillion rupees invested by foreign investors in India in the same period.

In 2001, India opened its defense sector completely to local companies and 26% for foreign ones. But many foreign equipment manufacturers didn't want to part with technology if their equity participation is only 26%.

Indian and foreign firms have formed 25 joint ventures, such as Tata Group's separate joint ventures with Lockheed Martin, AgustaWestland and Sikorsky.

Mr. Reddy said the air force imports equipment worth $10 billion to $12 billion each year, comprising 30% to 40% of the country's total defense budget, making it imperative to locally produce them.

India is in commercial discussions with Dassault Aviation S.A. of France to purchase 126 fighter jets. It is also in talks with U.S.-based Boeing Co. to purchase 15 Chinook and 22 Apache helicopters.

"As we continue our massive acquisition program, it is pertinent to reduce extreme dependence on imports," he said. "The current state of industry is such that it is unable to meet the requirements of the defense and the civil aerospace sector."

Source : online.wsj.com