Oct 12, 2010

Russia – India Sign Agreement for Setting up of JVC MTA

   The effort to design and develop a Multirole Transport Aircraft (MTA) by India and Russia received a significant boost with the signing of shareholders agreement for setting up of a joint venture company. A Joint Venture will now be formed between Hindustan Aeronautics Limited and the Russian Partners namely United Aircraft Corporation & Rosoboronexport to Co-develop and Co-produce Multirole Transport Aircraft (MTA).

MTA is a 15-20 tonne payload capacity Aircraft which would meet the requirement of the Indian Air Force and the Russian Air Force. The project has been approved by both the Government of India and the Government of Russian Federation. The main features of MTA are: Maximum take-off weight 65 tonnes, Payload Capacity 15-20 tonnes, Cruise Speed 800 kmph, Range 2500-2700 km, Service ceiling 12 km. The Aircraft will have two engines, state of the art features such as fly-by-wire, full authority digital engine control, modern avionics and glass cockpit.

The total development cost is around US $ 600.70 million (approx Rs.2900 crores) to be equally shared by both the sides. It is planned to manufacture 205 aircraft with 50:50 work share between HAL and the Russian partners. A Joint Venture Company (JVC) is being established with its headquarters at Bangalore, India for executing the MTA project in which HAL and Russian participants will have equal shareholding. [Based on MOD India Press release].

 Indian has now undertaken two major military aircraft development programmes with Russia the fifth generation fighter aircraft (FGFA) project and the MTA. The 50:50 venture between Hindustan Aeronautics Ltd and Russian United Aircraft Corp with Rosoboronexport acting as the intermediary was long overdue and the project would now hopefully take off in time.

The MTA deal is also seen by some as relaxation of the FDI rules as 26 per cent FDI cap in defence was lifted for the India-Russia joint venture. The domestic lobby is not to keen for lifting FDI and companies such as the Tatas, the Mahindras and L&T are opposing relaxation. Amit Mitra, secretary-general of Ficci, told The Telegraph, “As a chamber, we had formulated a calibrated policy which supported 26 per cent FDI in defence.” “What we pointed out was that FDI and transfer of technology, which is what India is looking for, are rarely directly proportional, so raising FDI is no guarantee for the transfer of technology,” Mitra said.  On the other hand those who support 74 per cent or 100 per cent FDI claim foreign investors will set up units in India leading to cheaper prices of defence equipment, secure supplies and steady jobs for Indians. [Daily Telegraph Report 25 September].

FDI in the defence sector remains hotly contested and this has led to some debate in the defence industry as well as foreign arms manufacturers investing in India.  Business Standard reveals that major defense companies from U.S., U.K., Germany, France and Canada have jointly written to Defence Minister A.K. Anthony seeking reforms in the Defence Procurement Procedure for making it "supplier friendly". The major demands include an enhanced FDI ceiling of 74 per cent, allowing dual-use technologies as offsets and creating an offsets authority to bring in predictability and transparency.

Given that the defence industry is capital intensive and the government has restricted FDI capital to only 26 percent there is no incentive to invest for this would entail working on a low capital which would not generate enough returns for defence majors who may be interested in India’s low cost advantage to set up shop here as a part of their global network. The Ministry of Industry is in favour of increasing the outlay to 75 percent but the Defence Ministry wants to do this on a case to case basis. This has now been confirmed by the increase in FDI to 50 percent in the MTA agreement with Russia. Therefore it appears that for some time to come the defence ministry is not likely to relent on increasing the FDI in defence across the board above 26 percent.

OCT 2010