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FDI in Defence Issues and recent developments
Contents
i. Introduction ii. Budget 2014 announcement
iii. Need of FDI in Defence iv. Criticism of FDI in Defence v.
Challenges
vi. Way Forward
Introduction
India lives in a hostile neighborhood. It has fought wars with
two of its neighbors and relations with these two neighbors are
still not friendly. In such a scenario, modern and adequately
equipped armed
forces are an imperative requirement.
Indian armed forces, i.e. the Army, Air Force and Navy, require
up gradation of their obsolete machinery and needs modern
technology. Any armed force is as good as its weapons. So to
achieve this objective,
India needs to make massive expenditure towards weapons
purchases.
Till now we have been fulfilling most of our defence needs
through imports and through purchases from Defence PSEs. But from
2001, governments policy has changed and Indian private sector is
also now
involved in manufacture of defence equipments.
Budget 2014 announcement
FDI in defence has been raised to 49% through Government route.
FDI limit of 49% is composite of all kinds of foreign investments,
i.e. FDI, Foreign Institutional investors (FIIs), NRIs, Qualified
Foreign
Investors (QFIs) and Foreign Venture Capital Investors
(FVCI)
FDI above 49% is allowed through Cabinet Committee on Security
on case by case basis, wherever it is likely to result in access to
modern and State-of-the-art technology
Need of FDI in Defence
The failure of Defence PSEs to deliver orders on time and keep
up with demand has meant that role of private sector in fulfilling
defence needs has increased. For example, the time taken to build
Delhi class
warship took 114 months while equivalent ships take 29-30 months
in the U.S. and Japan. Delhi, the first
in its class, may have involved a learning curve, but sadly, the
follow on Mysore and Mumbai also took
117 and 106 months. The Shivalik class which were contracted for
60 months took 112 months. The
Main Battle Tank Arjun has been finally in 2014 inducted into
army after a delay of four decades since
the project was first commissioned. The LCA Tejas is still
waiting for its final operational clearance. Indian
armed forces modernization cannot wait for such long delays.
Though we are manufacturing high-end products like the SU 30 MKI
fighters, Brahmos missiles and Scorpene subs in collaboration with
other countries, but these are licence productions of foreign
designed weapons, and even here we know that key assemblies will
be imported till the very end of the
programme.
India is one of the biggest importers of defence equipments.
Nearly 70% of defence procurement is done through imports. This has
a serious bearing on our Current Account Deficit. The next phase of
military
modernization can be based on imports.
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Due to our heavy dependence on imports for our defence needs,
our foreign policy sometimes also gets sub-ordinated to our defence
needs. So to have an independent foreign policy, we must end
our
dependence on other countries for defence equipment.
To strengthen manufacturing base for Defence equipments in
India, it is necessary to acquire cutting edge technology. This
requires foreign defence companies to set-up shop in India.
A surge of Defence production in India will lead to job creation
and employment.
Criticism of FDI in Defence
Already a number of private groups like L&T, Tata and
Mahindra & Mahindra have set up defence manufacturing units. It
has adversely affected the financial health of Defence PSEs. If
more FDI is allowed
then PSEs will become unviable and may also lead to loss of
jobs.
Private defence manufacturers have the urge to make abnormal
profits during war periods. In case of war, these companies can
hold the nation to ransom. Shifting defence manufacturing to
private hands
may hamper national security.
More than 10 foreign and domestic companies have been
blacklisted for corruption charges. Privatization of defence
manufacturing may increase such unethical practices.
Challenges
The expectation that by allowing foreign companies to set up
shop in India, our imports will vanish is not entirely correct. Our
heavy dependence on imports for aircrafts, tanks, submarines,
missiles etc will
persist. It will not be possible to ensure all of them set up
shop in India along with the system integrator.
In 2001, the Government took the first step towards opening up
FDI to 26% in defence. However, since then only a meager $4.8
million FDI has come in. Experts feel that until FDI is increased
beyond 51%,
defence sector will not see major inflow of FDI. Foreign firms
need to be in control since it is their
technology, developed often at considerable cost, and therefore
the need to protect their intellectual
property.
Some Industry analysts feel that FDI limit should be increased
to 100%. Even with 100% limit, foreign companies will like to
partner with Indian players due to their knowledge of local
environment and
condition. But increasing FDI limit to 100% is fraught with
risk. No country allows 100% FDI in defence
production because countries which are friends today may not be
friends tomorrow and decisions on
defence sale and technology transfer are taken by governments
and not by companies.
Lack of infrastructure like 24x7 available electricity,
efficient transportation, etc which have discouraged growth of
manufacturing in India will also be roadblock for defence
manufacturing.
Way Forward
India needs a domestic defence manufacturing base to cater to
its defence needs which are only going to increase in the future.
We cannot continue to depend on imports to fulfill our needs. They
adversely
affect our import-export balance and also hamper the
independence of our foreign policy.
The recent government decision is in the right step. We must
improve our infrastructure facilities to incentivize foreign
multi-nationals to set shop in India.
Along with increasing FDI in defence, we also need to get our
ordnance factories, defence PSEs, DRDO laboratories and the private
sector to act in concert to meet our defence needs.
India needs its armed forces to be ever-ready with modern
equipments and weapons so that we can thwart any aggression towards
our territory and safeguard our sovereignty. As the saying goes, If
you
want peace, be prepared for war.
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