7 September 2016
A combination of technology concerns and stress over the Scorpene data leaks have put a French naval firm’s FDI proposal in cold storage for now.
New Delhi: The Scorpene submarine leaks may have been the final nail in the coffin for India’s first 100% foreign direct investment (FDI) proposal in the defense sector, according to people with direct knowledge of the matter.
The FDI proposal in question was made earlier this year by French naval firm DCNS – the company which is currently helping build and design India’s six Scorpene-class submarines and was at the center of last month’s military data leak scandal.
It’s no secret that India’s push for indigenous defense production and greater foreign investment in the defense sector has been moving along slowly. While the DCNS proposal is a relatively modest investment, its rejection represents the challenges that defense minister Manohar Parikkar has had to face in building India’s defense manufacturing ecosystem.
In March, DCNS submitted a Rs 100 crore proposal for the setting up of a wholly-owned Indian subsidiary that would undertake research and development activities “in relation to air independent propulsion (AIP) systems for submarines”.
“From the moment the proposal was submitted, there were a couple of issues. As with almost any multi-million dollar defense deal, things were stalled because communication was not clear and adequate paperwork was not received. This happened around the time that the norms around FDI in defense were eased,” one defense ministry official, who declined to be identified, told The Wire.
In the months after the proposal was submitted, negotiations hit yet another roadblock: Namely, whether the AIP technology that DCNS was centering its FDI proposal and proposed Indian subsidiary around, qualified as “modern technology” required under India’s FDI regulations.
“One of the key stumbling points was that the propulsion technology that their Indian subsidiary would research and develop was already being transferred by DCNS itself to the DRDO (Defense Research Development Organization) as part of the Scorpene submarine development happening in Mumbai. The company is already developing the proposed tech in India, so how could it be allowed,” said the official quoted above.
According to industry sources, DCNS’s FDI plan specifically banked on the Modi government ordering another three Scorpene submarines that could have been outfitted with the AIP technology; which would have given the ships greater underwater endurance. According to two defense experts The Wire spoke to, if the defense ministry ended up ordering more submarines, the FDI proposal stood a better chance of going through.
Data leak fiasco:
On August 24, The Australian published excerpts of what it claimed was a 20,000-page document data leak that detailed the technical specifications of DCNS’s Scorpene-class submarines; including the ones being inducted into the Indian navy. This, according to sources, eventually proved to be the final nail in the coffin of the FDI proposal.
Two days after the data leaks, The Wire, quoting industry sources, reported that “it would be a wonder if DCNS’ FDI proposal went through” at this stage; with defense ministry officials going into damage-control mode and wanting to play down the data leaks as quickly as possible. A few days after that, Reuters reported that the government had no intention of purchasing an additional three Scorpene submarines.
Industry observers pointed out that before the data leaks were made public, both the defense ministry and the DCNS were still cautiously hopeful of sorting out any differences over whether the AIP technology qualified as modern technology and whether its existing technological collaboration with DRDO didn’t count as a conflict of interest. In fact, senior executives of DCNS were scheduled to visit New Delhi, in order to secure final approval for its FDI proposal, the week after The Australian eventually published its story.
After the leaks were made public, much of India’s defense establishment was riled up, with many senior officials advocating for a quick withdrawal from anything to do with the Scorpene submarines. Over the last few days, a number of indicators point towards the FDI proposal being dead in the water.
“The FDI proposal has essentially been put into cold storage. It is a lose-lose situation for the government. There is almost nothing to be gained by approving the FDI proposal. Not only is the technology in question, it would look terrible for the government to approve a proposal by DCNS, which is in hot water over the Scorpene leaks. Even if the government’s probe point towards the Scorpene leak not being a big deal, it isn’t prudent to immediately do business with this company right away,” an industry source told The Wire.
DCNS’s FDI proposal largely hinged on the government ordering three extra submarines: its proposed subsidiary could have helped the DRDO outfit the ships with stronger underwater endurance technology. Without that purchase, defense experts say, the FDI proposal looks less appealing.
In that regard, the FDI proposal by DCNS isn’t as state-of-the-art or valuable for India’s defense manufacturing ecosystem as the much-hyped American combat aircraft manufacturing proposals by Boeing and Lockheed Martin.
“The FDI proposal by DCNS, while very tiny in the larger scheme of things, was the first 100% FDI proposal under the Modi government’s new procurement policy. To have to reject it under these circumstances, even if it is a prudent decision, is a little bitter-sweet,” said one senior defense analyst, who declined to be identified.