India walks tightrope between East and West

BAE Systems' proposal to form a company with Mumbai-based Mahindra & Mahindra to develop and produce land systems was turned down on 8 October because the UK company wanted to own 49 per cent of the JV. Under India's current foreign direct investment (FDI) rules overseas firms are allowed to own a maximum of 26 per cent of domestic defence companies.

A spokesman from the UK company told Jane's shortly after the ruling was made that BAE Systems was "well aware" of the rule but "wanted to ask the question" of whether it could go ahead with the JV, particularly in light of comments by Indian Defence Minister AK Antony who stated this year that the FDI cap was not "set in stone" but could be relaxed on a case-by-case basis.

Possibly due to the remarks made by Antony, the decision was greeted with surprise and disappointment in India as the JV was regarded as an opportunity for a domestic private company to acquire technologies from a Western prime.

The judgement also led some analysts to question the political motives behind the decision, with one New Delhi-based defence analyst telling Jane's that JV proposals originating from Russia would probably "have an advantage [over those from the West] as they hold such an influence in India's defence sector".

The proposal expected to test this view is that of India's Hindustan Aeronautics Ltd (HAL) and Russia's Ilyushin Aviation Complex. This JV, to develop a multirole transport aircraft, would also see the foreign company owning a minority 49 per cent stake.

Talking to Jane's on 16 October, a source from the Indian public sector defence establishment - who did not want to be identified - agreed that Indian defence authorities "will not forego their relationship with Russia easily". He added, however, that "Western companies should not read too much into [the] BAE Systems decision".

Image: Indian Defence Minister AK Antony. (AP) 310 of 1,023 words