FDI Policy Amendment: Space Sector to get Strong Influx of Capital

In a historic move, the Union Cabinet has approved an amendment in the Foreign Direct Investment (FDI) policy, liberalizing the entry routes for FDI in the space sector. Stakeholder consultations in this regard were earlier held by the Department of Space. Whether government approval is required for investing depends on the thresholds prescribed under the amended FDI policy.

Prior to the amendment, FDI was permitted[1] in the establishment and operation of satellites through the government route only, i.e., prior approval from the government was mandatory. This is according to the existing FDI policy and Schedule I of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

India’s Decadal Vision

Currently valued at around $8.4 billion with a 2% share in the global market, the Indian space industry is expected to reach $44 billion, catering to 8% of the global demand, by 2033. A growth plan in order to achieve this milestone and develop the space economy was set out in the report dated October 10, 2023, released by the Indian National Space Promotion and Authorization Center (IN-SPACe). The nation’s manufacturing capabilities and capacity were sought to be enhanced through augmenting private sector capabilities in satellite and launch vehicles and redefining FDI norms to make it attractive.

Amended FDI Policy

The FDI policy has been eased pursuant to the Indian Space Policy, 2023, which demonstrated the government’s intention to promote private sector participation in the space economy. The press release dated February 21, 2024, issued by the Ministry of Commerce and Industry, highlights that more investment will enable non-government entities to utilize their skills and expertise in the areas of satellites and launch vehicles to “achieve sophistication of products, global scale of operations and enhanced share of global space economy”.

The liberalized entry routes specified under the amended FDI policy are depicted below:

Sr. No.

Activities

FDI Cap

Entry Route

1.       

Satellites-manufacturing and operation, satellite data products and ground segment and user segment

100%

Automatic route[2] up to 74%,

government route beyond 74%

2.       

Launch vehicles and associated systems or subsystems, creation of spaceports for launching and receiving spacecraft

100%

Automatic route up to 49%,

government route beyond 49%

3.       

Manufacturing of components and systems/ sub-systems for satellites, ground segment and user segment

100%

Automatic route up to 100%

Analysis

As can be seen from above, the amended FDI policy makes a reference to additional activities not covered under the existing policy which only refers to the establishment and operation of satellites. While limits set for investment in launch vehicles are more stringent in comparison to those applicable for investment in other activities, seemingly in light of their dual application in civilian and defence domains, it is unclear as to why 100% FDI has been expressly allowed for the manufacturing of components and systems for satellites. This is because the existing norms provide that FDI in activities not listed is permitted up to 100% through the automatic route.

Remarks

At its core, the amended FDI policy signals a shift towards increased foreign investment, fostering innovation and global collaboration. This move underscores the government’s commitment to leveraging private sector participation as a catalyst for driving growth and competitiveness in the space domain.

The primary benefit of the amendment is its potential to attract substantial capital into the Indian space sector. Foreign investors, in light of a conducive regulatory environment, are likely to inject much-needed funds into Indian space startups and companies. This influx of investment capital will accelerate the pace of research, development, and deployment of solutions in satellite manufacturing, launch services, and space exploration.

Moreover, the amendment facilitates technology transfer agreements between Indian entities and their foreign counterparts. Collaboration with foreign investors would catalyze indigenous innovation and capability building within the Indian space ecosystem. Such collaborations would enhance India’s space capabilities and in effect position India as a preferred partner for international space missions and projects. The amended FDI policy would also foster economic growth, empowering India to assert its leadership in the global space arena and bolstering national security.

References:

[1] Subject to the sectoral guidelines of the Department of Space or the Indian Space Research Organization (ISRO).

[2] As per the FDI policy and the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, ‘Automatic route’ means the entry route through which investment by a person resident outside India does not require the prior approval of the Reserve Bank of India (RBI) or the Central Government.

Image Credits:

Photo by SpaceX on Unsplash

The primary benefit of the amendment is its potential to attract substantial capital into the Indian space sector. Foreign investors, in light of a conducive regulatory environment, are likely to inject much-needed funds into Indian space startups and companies. This influx of investment capital will accelerate the pace of research, development, and deployment of solutions in satellite manufacturing, launch services, and space exploration. Moreover, the amendment facilitates technology transfer agreements between Indian entities and their foreign counterparts. Collaboration with foreign investors would catalyze indigenous innovation and capability building within the Indian space ecosystem. 

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Indian Space Policy, 2023: Placing India into a Higher Orbit in the Global Space Economy?

Achieving India’s space aspirations does have a lot to do with “rocket science”, but that alone won’t cut it. The Indian Space Policy, 2023 has taken an important step to create and nurture a robust enabling ecosystem, and the countdown has begun for India as a space power to move to a higher orbit.

Introduction

India’s space prowess has come a long way since ISRO launched the country’s first rocket in 1963. But in these 60 years – and especially in the last decade – space has become a critical domain given its potential not just for peaceful purposes such as superior communication in remote areas, better weather forecasting and disaster warnings/management but also for strategic (military) reasons. The rivalry between the USA and China clearly extends to space, with both countries building weapons that can be deployed in space and used to target virtually every corner of the earth.

In this context, India can ill-afford to not develop its space-related scientific and technological capabilities. We have emerged as a globally competitive provider of launch services. But this is not enough, given that India’s market share is still relatively small. Our space programs are still largely powered by government initiatives. This is not enough; advancing our spacetech capabilities and competing commercially with other global rivals needs a larger domestic ecosystem that can tap into the intellectual and financial capital available to the private sector. This process began a couple of years ago and has already seen many Indian startups design and build satellites and other space vehicles.

The Indian Space Policy, 2023

The announcement of the Indian Space Policy, 2023 by the Government of India earlier in April is important for three reasons, namely: –

  • It provides a sharper focus on the role of ISRO and more clearly demarcates the roles of New Space India Limited (NSIL) and Indian National Space Promotion and Authorization Center (IN-SPACe).
  • It creates a clearer path for private sector participation.
  • It takes a holistic view of the sector, including within its ambit not just the building and launch of satellites, rockets and other space vehicles but also satellite communications, deep-space exploration, remote sensing, data gathering and dissemination and space transportation.

The new policy is expected to boost this process by channelling efforts in different segments of the value chain. ISRO is being asked to develop new technologies and systems, in other words, drive critical R&D, while NSIL will handle the operational aspects of ISRO’s missions, as well as other strategic activities. IN-SPACe will function as the interface between ISRO and non-governmental entities (including the private sector, which was permitted to enter the space sector in 2020). This will improve the creation and adherence to more evolved operating procedures. 

The private sector will be allowed to use ISRO’s facilities for launches, which is critical because startups and smaller companies will often not have the resources needed to tap other launch facilities. The new policy also seeks to encourage private investment in the creation of new infrastructure as well – something that will be needed as more Indian ventures seek engineering, manufacturing and launch infrastructure. Private companies that ISRO sub-contracted work to can, under the new policy, also work with other customers (including foreign companies).

By one estimate, there are already more than 400 private sector entities associated with different facets of the space sector. ISRO itself has supported over 150 startups. College students from across India too have designed and built satellites, some of which have already been launched successfully.  Given rapid advances in various fronts – materials, fuel, communications, miniaturization, AI, etc., and the emergence of so many new application areas, the space industry is now virtually a “sunrise” industry. The new policy is intended to give a boost across the R&D-design-build-launch-harness value chain that will deliver even more thrust to power India’s aspirations as a leader in the space economy.

The fine print matters!

India currently accounts for less than 2% of the US $500 Billion space economy. It is possible to increase this to 10% in the next 3 years. But there’s many a slip between the proverbial cup and the lip. As with every other policy, how the rules are framed, the specific details covered, and the actual wording will collectively determine how well this policy achieves its objective of propelling India’s ability to garner a much larger share of this monopolistic market and become “atmanirbhar” in a sphere that is becoming increasingly critical by the day.

The rules will need to be drafted carefully to ensure that the legitimate interests of innovators are safeguarded (through appropriate mechanisms for protecting Intellectual Property Rights) without compromising national security or other interests (e.g., by allowing critical IPR or sensitive data to be commercially exploited). Shareholding structures and investment routing will need to be carefully monitored to ensure that interests inimical to India do not gain control over key technologies or assets. Individual contracts too will need to be carefully drawn up so that the interests of Indian entrepreneurs/ventures and other entities are protected.

By one estimate, there are already more than 400 private sector entities associated with different facets of the space sector. ISRO itself has supported over 150 startups. College students from across India too have designed and built satellites, some of which have already been launched successfully.  Given rapid advances in various fronts – materials, fuel, communications, miniaturization, AI, etc., and the emergence of so many new application areas, the space industry is now virtually a “sunrise” industry. The new policy is intended to give a boost across the R&D-design-build-launch-harness value chain that will deliver even more thrust to power India’s aspirations as a leader in the space economy.

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Private Sector Fuels India’s Space Economy

The Indian National Space Promotion and Authorization Centre (IN-SPACe) was set up in 2020 as an independent body to oversee regulation of all space related activities in India, including the authorization of private rocket launches. The government’s decision to allow the private sector into India’s space sector was aimed at broad-basing innovation capabilities and speeding up India’s ability to compete in the global market for space technologies- a high-growth market that has historically been dominated by a small number of players from the US and Europe.

This decision seems to be paying off, because India’s private sector has already become quite active across the value chain in the space sector. Nearly 300 entities are already registered with IN-SPACe, of which 30% are startups. On 18th November 2022, Vikram-S, a small single-stage rocket developed by Hyderabad-based startup Skyroot Aerospace, was successfully flight tested. This marks the beginning of “Prarambh”, the company’s sub-orbital mission. By year-end, Chennai-based Agnikul Cosmos expects to launch its small rocket too. Pixxel, another space startup, has already launched Shakuntala, India’s first privately built earth imaging satellite and a second satellite Anand. A consortium of L&T and HAL has been awarded a contract to build five PSLVs. This is the first time anyone other than ISRO has been tasked with this key responsibility- an indication of the government’s rising confidence in our private sector. The success is testament to the robust space sector ecosystem being built as a result of close collaboration between ISRO, IN-SPACe, academic institutions, and the private sector (both startups and established companies).

 

Why the Private Sector is Important for India’s Space Economy?

The capability to launch small rockets is critical because smaller rockets can place their payloads in more precise orbits. Also, they can be produced in shorter timelines by using 3D printing technologies. Miniaturization of components means that required functional capabilities can be achieved through smaller satellites. All this means that satellites with specific functional capabilities can be quickly assembled and launched. Smaller rockets can be easily fueled by liquid propellants, which are inherently easier to manage; they are also less prone to vibrations, which can become a challenge for launch vehicles that carry sensitive payloads.

Given rising geopolitical uncertainties, there is now a higher risk of conflicts between countries arising at short notice. Increasingly, wars will be fought using cyberattacks and directed energy weapons to degrade the enemy’s vital assets such as communication satellites and missile defence batteries. Swarms of weaponized drones too will be deployed to target and destroy vital military installations in remote, hard-to-access areas. In such a scenario, it becomes critical that as a country we can launch new satellites and other space assets quickly to replace lost capacities or augment and complement new space-based capabilities that are needed.

ISRO has successfully designed, developed, and launched heavy, multi-stage rockets into space. These technologies/capabilities have helped place many satellites in orbit and in turn, these are playing a key role in India’s development. ISRO has also developed the SSLV (Small Satellite Launch Vehicle), but unfortunately, its technology demonstration mission failed earlier this year. It is this gap that the private sector can help plug at short notice.

 

Public-Private Cooperation is Vital to Power India’s Space Economy

As various countries seek to build/enhance their space-based defence capabilities, countries like India can benefit from commercial contracts to launch satellites/other payloads and conduct defence missions in space. With defence capabilities increasingly relying on assets deployed in space, the evolution of India’s private sector space capabilities will also boost our credibility as a builder of solutions and not just as a provider of reliable, cost-effective space launch services. While ISRO continues to build its reputation as a reliable partner, it needs to scale up its ability to launch satellites for its customers. In October 2022, ISRO successfully launched 36 satellites for UK-based OneWeb (partly owned by the Bharti group), marking the use of the LVM3 rocket; this was also one of ISRO’s largest commercial orders. More such opportunities can come ISRO’s way because satellite-based internet services are rapidly becoming cost-competitive and an easy way to deliver connectivity to far-flung areas where building fibre-based infrastructure is difficult due to terrain and weather conditions.

It is estimated that by 2025, India’s space business will grow to US$12.8 Billion from US$9.6 Billion in 2020 (source: https://timesofindia.indiatimes.com/india/how-indias-space-startups-are-aiming-high/articleshow/95637043.cms). ISRO is a shining example of a public sector entity that has consistently overcome huge odds (including sanctions from time to time) to indigenously develop world-class capabilities in frontier areas like space technologies. Its ability to do much more has arguably been limited by budgetary support. And although launches are the most visible part of a space economy, they are by no means the only facet: design, development, manufacturing, building technology demonstration prototypes etc. are all just as important. Now, with the innovative energies and other resources available to the country’s private sector, significant synergies can be unleashed through public-private partnerships in the space sector.

References: 

Image Credits: Photo by Pixabay: https://www.pexels.com/photo/space-technology-research-science-41006/

With defence capabilities increasingly relying on assets deployed in space, the evolution of India’s private sector space capabilities will also boost our credibility as a builder of solutions and not just as a provider of reliable, cost-effective space launch services. While ISRO continues to build its reputation as a reliable partner, it needs to scale up its ability to launch satellites for its customers.

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