Radhakrishna Rao
There is a need for in depth evaluation of the
possible long term political, geostrategic and
security fallouts of an increased FDI cap in the
defence production sector.
Specifically, the trade sanction and technological
embargo emanating from the US and its western
allies could deal a paralysing blow to a joint
venture involving a partnership of a US-based
defence company. Sufficient strategic safeguards
should need to be built into joint ventures involving
foreign participation. Otherwise the entire exercise
of enhancing FDI cap in India’s defence production
sector could prove counterproductive, with serious
consequences for the combat-readiness of the
Indian defence forces. Self reliance in defence
production should revolve round a long-term vision
of the security threat perception faced by the
country.he May 2014 change in the Indian leadership
where the National Democratic Alliance (NDA)
government led by Prime Minister Narendra Modi took charge signalled a vastly stepped-up
commitment to India’s crisis prone defence sector with particular reference to attaining self reliance in the defence manufacturing. In fact, the Bharatiya Janata Party’s (BJP) election manifesto had made a strong and specific commitment to end India’s dependence imported arms and ammunition
by boosting domestic production of high
performance fighting equipment. Foreign Direct
Investment (FDI) is already considered one of the ‘game changers’ for boosting India’s home-grown capability in the production of state-of-the art combat systems. In fact, the 26% FDI cap on defence sector that former Prime Minister
Manmohan Singh-led United Progressive Alliance (UPA) government had failed to upwardly revise was considered far from an attractive proposition for the global defence and aerospace conglomerates to invest in India’s defence production sector. But then whether hiking the FDI cap to 49% by the NDA government in its maiden budget presented in the Indian parliament on 10 July would prod foreign investors to pass on their
latest genre technologies to Indian partners is not an easy guess at this moment.
Far from being a magic wand to help India build a home-grown defence industry based on indigenous expertise, an increased FDI could be considered no more than a catalyst for the Indian defence producers to face the challenges of designing and developing high-end, complex fighting equipment with domestic resources. In this context, Rahul Gangal, Principal, Roland Berger Strategy Consultants says, “I think this is a positive step though it may not be as much of a move forward as everyone was hoping. The treatment of the balance 51% will be critical .The earlier policy at 26% FDI required 51% to be held by one resident Indian entity. It would be interesting to note what the change in that is, if any.”
Indian Finance Minister and Defence Minister Arun
Jaitley, while presenting the budget for 2014-15,
did admit to the ignominious distinction India has
achieved as the ‘largest importer’ of arms and
fighting systems. That a country which has sent
probes to Moon and Mars continues to meet 2/3rd
of its defence requirements via imports stands out
as a far from edifying testimony to its “poor state
of defence industrial infrastructure,” said Jaitely.
“We are buying a substantial portion of our
defence requirements directly from foreign players.
Companies controlled by foreign governments and
foreign private sectors are supplying our defence
requirements to us at a considerable outflow of
foreign exchange,” he added.
Significantly, it has also been decided to continue
with the policy of permitting higher FDI cap beyond
the stipulated 49% in the event of a foreign investor
willing to part with the latest genre technologies at
his command. This, however, would be subject to
approval by the Cabinet Committee on Security on
a case-to-case basis. For quite some time now,
industry and trade bodies in India have been
lobbying for facilitating an increased FDI inflow in
the defence production sector. It was in 2001 that
India opened its defence production sector to
private participation. However, the view of the
Indian industrial sector active in defence
production is that it would be naïve to expect high
technology to flow into Indian industry simply
because foreign firms can invest more and
repatriate profits. One would therefore need to wait
and watch.
India should go about building a military-industrial
complex based on its long term strategic needs. At
present, much of the defence production activities
in India are centred on the facilities of the Defence
Public Sector Undertakings and Ordnance Factories
Board (OFB). Lack of direction and motivation as
well as interference meant that they could come
out with very few new and innovative products
featuring state of the art technologies. Conversely,
private sector companies, that have made a
modest foray into the defence production sector,
are not enthusiastic about investing in research
and development to build high-end fighting
systems. As such, the private sector in India’s
defence manufacturing would need to be
encouraged and incentivised to invest in research
and development through a slew of proactive
measures.
There is a need for in depth evaluation of the
possible long term political, geostrategic and
security fallouts of an increased FDI cap in the
defence production sector.
Specifically, the trade sanction and technological
embargo emanating from the US and its western
allies could deal a paralysing blow to a joint
venture involving a partnership of a US-based
defence company. Sufficient strategic safeguards
should need to be built into joint ventures involving
foreign participation. Otherwise the entire exercise
of enhancing FDI cap in India’s defence production
sector could prove counterproductive, with serious
consequences for the combat-readiness of the
Indian defence forces. Self reliance in defence
production should revolve round a long-term vision
of the security threat perception faced by the
country.
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