09/07/2014
The issue of FDI in defence has attracted much attention and serious debate since the Department of Industrial Policy and Promotion proposed 49 percent FDI in cases where there is no technology transfer, 74 percent with technology transfer and 100 percent when it came to state of-the-art technology. The prominent voices on the subject can be grouped into two camps. The conservatives want the cap to be at 49 percent and no more in view of the security concerns related to the sector. The realists, on the other hand, believe that the real funds will come in only if investors get to control their investments. The government’s decision on the subject will be influenced by many a stakeholders who are affected by the extent to which FDI is permitted, apart from the quest for self-reliance.
The conservatives broadly include the trade unions, Defence Public Sector Undertakings and the Ordnance Factories Board, and surprisingly even certain sections of the domestic private sector. The Government Employees National Confederation, which claims to represent government employees working in the central and state government including local bodies, have submitted a memorandum to the Raksha Mantri on June 16, 2014 regarding their concerns on hike in FDI[i]. The Confederation in its letter to the Raksha Mantri have stated that “the major reason for reluctance in encouraging the Private Sector into defence production and welcome FDI in the sector is on account of concern for the Defence PSUs and the Ordnance Factories… it is clear that ... the role of the Defence PSUs and the Ordnance Factories would only be further marginalised”.
Federation of Indian Chambers of Commerce and Industry(FICCI), which includes innovation majors Larsen & Toubro and Tata Power (strategic electronics division), has rejected the notion that raising FDI will stimulate domestic manufacturing. The FICCI believes that control should always remain in Indian hands (or cap at 49 percent), the foreign OEM must bring in "key technologies as required in the priority list of the Ministry of Defence", the foreign company's home government must provide "in-principle permission to share technology with Indian partner"; intellectual property rights generated by the joint venture must reside in India, amongst other conditions[ii]. While the idea of retaining control stands to reason, but foreign companies need to be really desperate to yield to such stated requirements.
CII in past has vociferously demanded for increase in FDI, even up to 100 percent. One of its reports, “Creating a Vibrant Domestic Defence Manufacturing Sector” has projected that defence and aerospace sector has the potential of creating one million new jobs in the country and increased FDI will only expedite this process[iii]. However, recently they too have chosen to be guarded in their recommendations and have issued a statement that, "CII is hopeful that the present government is going to roll out a forward looking FDI policy in the defence sector at the earliest."[iv]. The industry which has since long complained regarding the inadequacy of the extent to which FDI is permitted, is apparently divided and almost conservative in the final moments of reckoning. However, at the same time there are strong domestic players with sound order books, who have urged the government to consider 51 to even 100percent FDI.
The realists on the other hand reason that the present limit of 26 percent FDI has barely attracted FDI worth only $4.94 million in the sector in past 14 years. This is despite the fact that in the year 2013 India was the seventh most popular FDI destination in the world and it attracted $25.5 billion in FDI inflows in the year 2012 alone[v]. Therefore, while India clearly emerges as an attractive destination for FDI, the scanty FDI in defence is obviously as a consequence of restrictive policies in the sector. FDI Confidence Index of the country is very high but that of defence as a sector is extremely low.
Moreover, arguments from the national security perspective also need to be seen in the correct perspective. The interesting reality is that for a foreign firm, refusal to accept 26 percent stake, can lead to retaining of 100 percent stake. An arms producer, who refuses to accept the current restrictive FDI terms and conditions, stands a chance to bag the complete order to supply the required weapons when imported.
Let us compare and evaluate three hypothetical but plausible options, given that the DRDO, DPSUs, Ordnance Factories and the domestic private sector do not have the requisite technology/production capability to meet the needs of the services. Option A is to import 1000 light artillery pieces from a foreign firm located overseas. Option B is to let the foreign firm’s owner invest and create a facility on our soil to produce these artillery pieces with say 74 percent stake in this facility and Option C is to accept voids in capability till the domestic defence industry rises to the demands of the services. We need to weigh the pros and cons of these options very carefully to arrive at the one which serves our national interests the best. Any option which brings defence manufacturing bases on home turf is a safer and more reliable option than that which banks on overseas manufacturing bases. Moreover, if exercising of such an option creates jobs, helps the country in having a trained and experienced workforce, improves infrastructure, reduces pressure on precious foreign exchange and ensures that there are no critical capability voids, then it is worth considering.
The need of the hour is to build a consensus amongst stakeholders that FDI is in our interest in areas where we lack the requisite technology and nothing is forthcoming from our own captive sources. If such a consensus exists, we need to raise the FDI Confidence Index of the country’s defence sector by taking measures as suggested by the Department of Industrial Policy and Promotion, rather than making cosmetic changes to the current policy. In case we fail to build such a consensus, then the nation shall pay its cost either by a steep import bill or by accepting critical capability voids.
The author is a Senior Fellow at CLAWS. Views expressed are personal.
[i] Bharatiya Pratiraksha Mazdoor Sangh. (n.d.). Retrieved July 3, 2014, from Documents: http://bpms.org.in/documents/arun-jaitley-o8b9.pdf
[ii] Shukla, A. (2014, June 12). CII & Ficci disagree on raising FDI in defence. Retrieved Jul 3, 2014, from Business Standard: http://www.business-standard.com/article/economy-policy/cii-ficci -disagree-on-raising-fdi-in-defence-114061200145_1.html
[iii]CII. (2014, Jun 10). Retrieved July 03, 2014, from CII on FDI in Defence: http://www.cii.in/PressreleasesDetail.aspx?enc=1RMPukRTV2pevMnGnX nqbSkbsOnF1Fqu1jNY1wZUIqc2r/eIqjNQlmXhUdOBNVkml20UsjDkoyXvoW2KYz1 nquRVE6FDMmZQRSUbk9azsjEZB3HnjSGcPDz8hKjBKv52iVPsrYJWoH4BUZ+kz/Cf NqohtXCXa88/6bP6g13S2hg=
[iv]Sidhatha. (2014, Jun 30). The Times of India. Retrieved Jul 03, 2014, from Industry chambers flip-flop on 100percent FDI in defence sector: http://timesofindia.indiatimes.com/business/india-business/Indust ry-chambers-flip-flop-on-100-FDI-in-defence-sector/articleshow/37 491612.cms?
[v]Atkearney. (n.d.). Retrieved July 03, 2014, from Foreign Direct Investment (FDI) Confidence Index: http://www.atkearney.com/research-studies/foreign-direct-investme nt-confidence-index
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