Defence Industry

FDI in Defence: Dispelling the Myths
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Issue Vol. 28.3 Jul-Sep 2013 | Date : 08 Jul , 2014

India’s private sector has certainly come of age but needs hand-holding in the interim to be able to graduate to the production of complex weapon systems. This hand-holding can be done only by foreign technology majors. For that, establishment of joint ventures with equity participation is a prerequisite.

India has to make up its mind whether it wants FDI in the defence industry or not…

It was left to Anand Sharma to remind the policy makers that it was unrealistic to expect domestic manufacturing to make state-of-the-art equipment without sourcing high-end technologies. He advocated encouraging foreign defence manufacturers to help catalyse the growth of the indigenous industry.

  • Misconception Five: Foreign technology can be sourced through offsets

In a paradigm shift in India’s approach towards offsets, the Defence Offset Guidelines (DOG) issued by MoD in August 2012 allowed the Transfer of Technology (ToT) as a permissible avenue for discharging offset obligations.

DOG offers three recipient-centric options to foreign vendors to earn offset credits against ToT. One, the foreign vendor can make investment in Indian enterprises in ‘kind’ in terms of ToT through joint ventures or through the non-equity route for co-production, co-development and production or licensed production and/or maintenance of eligible products and provision of eligible services. Offset credit for ToT would be ten per cent of the value of buy-back by the OEM during the period of the offset contract, to the extent of value addition in India.

Two, ToT can be provided to government institutions and establishments engaged in the manufacture and/or maintenance of eligible products and provision of eligible services, including DRDO. It includes augmentation of capacity for research, design and development, training and education. However, there is no mandatory buy-back stipulation.

Three, DRDO can acquire technologies and test facilities in ‘areas of high technology’. A highly imprecise list with open-ended description of vast array of related technologies that DRDO seeks has been made public. It is left to a foreign vendor to study the list and offer technology of his choice. Overlooking the basic fact that it is not the type of technology but its relevance that should dictate the selection, India has abrogated that right in favour of the vendors. Thus technologies that will flow to India will be availability-based and not need-based. Needless to say, every vendor will try to pass off low-end technologies that do not require export licenses and are cheap to implement.

Production of high-tech systems by a foreign company in India would be infinitely better than India importing systems from abroad…

Further, multipliers are normally used to assign additional weightage to different offset programmes to provide vendors with incentives to offer offsets in targeted areas. Unfortunately, India has trashed the concept of multipliers by making their assignment usage-based and not as per the degree and exclusivity of technology. Resultantly, vendors will have no incentive to offer high-end technologies.

As seen above, DOG demonstrates the muddled thinking of the policy makers. It is extremely doubtful if the new policy can lead the country towards the achievement of much touted aim of self-sufficiency in defence production, especially as the upper cap for FDI has been retained at 26 per cent for offset cases as well.

  • Misconception Six: India can do without foreign funds in defence

An influential segment of decision makers has been propagating the view that India does not need foreign funds and can afford to pay for what it wants. It cites India’s huge shopping list to buttress the argument.

For an aspiring power like India, FDI is not just a question of acquiring funds, but more importantly, it represents access to the latest technologies. Most defence products involve a relatively high level of technology and this technology gets transferred only if the foreign partner has a long term stake in the company. FDI pre-supposes a long term commitment and lasting relationship between the foreign and local enterprise. FDI sets in motion a chain reaction wherein FDI upgrades local technology which, in turn, attracts more FDI with higher technology and the cycle goes on. This is of vital importance to the defence sector which is highly capital intensive and undergoes rapid obsolescence of technology.

India needs defence technology desperately. It is lagging behind by up to twenty years. It is foolhardy to waste time and resources in trying to reinvent the wheel. India needs to import latest technology through FDI to bridge the current gap. Thereafter, the imported technology should be used as a spring board for developing newer technologies indigenously.

India must exploit its favourable geo-political location and aspire to be a regional hub for global outsourcing of defence equipment…

The Way Forward

India has to make up its mind whether it wants FDI in the defence industry or not. The present policy with its 26 per cent limit has failed to elicit any positive response. Thus it is a non-starter. If India feels that FDI is not required in defence, it can continue to stick to the current failed policy. However, if the government wants foreign companies to invest in India, it has to change tack and revisit the policy.

As infusion of technology is the primary objective of inviting FDI, India should have a technology-centric policy. Defence industry covers too vast a spectrum and it is patently incorrect to apply a single FDI cap to all cases. All joint venture proposals should be assessed by DRDO on the basis of nature, level and depth of technology involved.

Whereas proposals with commonplace low technologies can continue to be governed by 26 per cent cap, the limit for proposals with stabilised technologies that are available from multiple sources can be raised to 49 per cent wherein majority shareholding still remains in Indian hands. Similarly, proposals that involve latest high technologies or exclusive technologies can be allowed 51 and even 74 per cent FDI component.

In rare cases, when infusion of frontier and cutting-edge technologies is promised, even 100 per cent FDI may be permitted. Such a methodology will provide protection to the development of indigenous research and development as well. Higher FDI can be allowed only in those technologies in which India does not make much headway. It will be an excellent safeguard to ensure that indigenous growth does not get ‘stymied’, as feared by the MoD.

Whereas developing nations prefer FDI in Greenfield projects, developed nations seek acquisitions/mergers. India can exercise both the options. Higher FDI limit can be considered for Greenfield projects that add new capacities to indigenous production.

India should adopt a flexible FDI policy to import much needed technologies which cannot be mastered through indigenous efforts in the acceptable time frame.

India must exploit its favourable geo-political location and aspire to be a regional hub for global outsourcing of defence equipment by partnering foreign defence manufactures as a part of multi-nation consortiums. Restrictions on capacity should be relaxed so as to enable economies of scale. It will also reduce India’s procurement price. Exports should be encouraged to ensure economic viability of an enterprise as also to earn foreign exchange to offset the initial foreign exchange outflow and repatriation by foreign investors.


In a high level meeting of the Union Cabinet held on July 16, 2013, it was decided to accept the recommendations of the MoD. The FDI limit was kept unchanged at 26 per cent. However, as a sop to the Commerce Minister, it was decided that higher FDI limits may be considered by the Cabinet Committee on Security for cases involving state-of-the-art technologies. Interestingly, it is for the MoD to grade a technology as state-of-the-art and initiate proposal accordingly. The MoD has accepted the provision as a façade to appear reasonable, knowing well that the proposition is totally impracticable and meaningless.

As suggested above, India should adopt a flexible FDI policy to import much needed technologies which cannot be mastered through indigenous efforts in the acceptable time frame. Unfortunately, every time the issue of increasing FDI limit comes up, the opponents resort to their time-tested subterfuge of raising the bogey of security concerns and threat to indigenous industry, thereby hiding their selfish reasons. In any case, India can incorporate necessary security clauses in the initial license to ensure that an unscrupulous entrepreneur does not play truant in crisis situations. India should reserve the right to take over a facility if required in an operational emergency. Most countries do that.

Production of high-tech systems by a foreign company in India would be infinitely better and safer than India importing fully built-up systems from abroad. Indigenous manufacturing facilities will also ensure better life-time support for the equipment. FDI has immense potential to raise technological threshold and kick-start India’s quest for self reliance in defence production.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Maj Gen Mrinal Suman

is India’s foremost expert in defence procurement procedures and offsets. He heads Defence Technical Assessment and Advisory Services Group of CII.

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21 thoughts on “FDI in Defence: Dispelling the Myths

  1. Wow…Quite a capitalistic article Sir…!! This article suggests that the pose of argument is more important to you than the actual pursuit of truth. In fact your clever answers take precedence over profound questions.

    Do you know there is a country called United States of America in this world. If you do, than I suggest you to go through the country’s real history and current economics. US is the best example of a notion called THE MILITARY-INDUSTRIAL COMPLEX. This notion does not rise or occur accidentally. It is a consequence of industrialising the Military & Defence sectors. Despite having an infinite supply of Dollars(with the federal reserve banking & petro-dollar arrangement with OPEC), the US has to constantly manufacture conflicts. This industrialisation require constant wars for survival and growth. And that is the reason why the US had to manufacture bogus false flag operations & outright provocations to engage in WW1(Provoking Germany for the sinking of Lusitania), WW2(Provoking Japan for an attack on Pearl Harbor), VIETNAM(Lying about the Gulf of Tonkin incident which never happened) & now the so called ‘WAR ON TERROR'(a self inflicted 9/11).

    Do you want largest Democracy of the world to follow in the footsteps of the Oldest Democracy of the world…?? A smart man makes a mistake, learns from it, and never makes that mistake again. But a wise man finds a smart man and learns from him how to avoid the mistake altogether.

    Allowing FDI in the National Defence is an act of treason against motherland. Do you think the foreign investors care about our national & strategic interests?

    If we cannot arm & equip our defence forces than it’s useless to have armies, because purpose of armies & defence forces is not to invite foreign investments, but to protect against foreign armies.

  2. I am shocked to read comments of Arun. Grow up man. You have not countered a singlke point of the article. Learn to debate issues rather than calling names. Every one can abuse a writer. Find logic to counter him. I could not. It is a simply superb writeup. Tell me, how is safer to import a system rather than asking OEM to build in India. What ha syour drdo done in last 60 years. Shameful approach.

  3. Sir, Thank you for the brilliant article. I wish you could get this article out to more people and the PM and the defense ministry. I hope you do manage to get this article to be read by the Govt. India seriously needs to cut down on defense imports. It needs to become a manufacturing hub. If not US or French companies, we should let Israeli companies have 74% FDI in defense. They have the technology and we have the man power, together both countries can reach great heights.

  4. BTW, Russia does not allow 100% FDI in defence. Nor does China. France makes sure its Thales, Dassault are owned by French controller ship or by politically reliable allies. Yet, India must allow 100% FDI.
    The DRDO is apparently worthless and mediocre. Yet, its codeveloped Brahmos can strike targets pinpoint in mountainous terrain (which its original Yakhont baseline cannot). Its Agnis can go 5000 km away & its Akash can hit targets 30 m above sea level.. when self appointed experts in defence procurement wear their bias so openly and shill for foreign interests whilst running down their own countrymen using dubious claims, why should anyone take them seriously? Sorry to say, but Suman’s grandiloquent posturing (India’s foremost expert) etc is not sufficient for the MOD or anyone else to make policy decisions on. I think the current admin has showed what it makes of such pomposity – the DRDO’s capital budget is up 60%, while the capex for imports for services in large platforms is capped at prior levels. India has to develop its own industry & proceed ahead, not on the whimsy of folks like Suman who will gladly run down their own people to score brownie points for dubious policy decisions.

  5. Nothing much in this article other than Suman batting for the foreign OEMs interests and doing his usual DRDO/DPSU bashing in the guise of being a neutral observer. No doubt if the FDI cap is relaxed, the good General will make his way as advisor to one of these august organizations as their Indian head of operations like many of his peers have done. While the Navy is busy equipping its ships with DRDO items, the Army is full of gentlemen like Suman, gleefully awaiting imports and unwilling to work with local industry or DPSUs whom they call names. No wonder India is in such a mess. As if any foreign OEM would anyways work with local industry private or public, if it could get 100% owned subsidiary in India. But Shri Suman is more bothered about the interests of the poor foreigners! So it goes. Lord save us from self appointed foremost experts, strategists and their policy prescriptions.

    • Agree with Arun. DRDRO has done excellent work despite low funding and more bias from both our defense forces who are more aligned with external vendors for making money thru other means. If given a full freedom, time, and resources our own organizations can do much better job than external vendors. Just trust our own DRDO, ISRO and other who have done fantastic job compared to even the US NASA which has the record of many failures…don’t lobby and write articles for the sake of making money, do it for country, you are an army men….this kind of articles don’t make sense, you know it from your heart

  6. 49 % FDI in defense is a Good warm-up towards 100 FDI!! Let’s see if patient comes out of coma, FDI 2000-2014 only $4.94 bln of the overall $322 bln. What exactly is FOREIGN of FDI? Is Laxi Mittal with Indian passport qualified to open defense facility? Sweat/research shops in India but headquartered (top brass) in say UK? How about a PIO is he eligible to run business from US/India or only born/brought-up never an NRI, is this what is ‘Indian’ who wants to have control 51% stake? At McKenzie, ,CITI, , PEPSI, Microsoft/Nokia top brass are/were India educated FOREIGNER, not too sure on their passport identity. L&T an aggressive player in defense, hydrocarbon business headquartered in Sharzah, two CEOs of its IT arm are based in US, not too sure if they still hold Indian passport. There were news paper reports/speculation of shifting L&T head-office to Dubai, of hiring an Italian to head hydrocarbon business of L&T. Mr. Naik is slogging at 72 to find successor, fighting talent crunch due to life style and global (business hub) location expectations of top Indian/global talent. Foreign of FDI needs to be established to shed Indian/Foreign mindset. Incremental 100% hike in defense budget over next five years, utilized to strengthen ‘bellwether’ all time most reliable RAKSHAKS, defense PSUs. ‘Private Sector’ Indian/foreigner can play in a level playing field of 100% FDI. Play well, enter/exit based on profits – but please don’t mix profit with patriotism/protection – Be a A business MaN.

  7. Dear General,
    Ii is a good analysis. The most important information ,mentioned in your article is that no proposal for FDI was received till 2004, a four long years after Govt allowed 26% investment and 100% equity. We have to find out the root cause behind such apathy.
    It may be appreciated that major share of foreign procurement remains within missiles ,aircraft,ships,tanks,submarine radar etc.These are high-end products ,need huge investment and strong technology base.Whatever limit is set to FDI,the foreign manufacturer will never part with the real technology or the Know-Whys. This puts the Indian investors in a precarious position ,in case the foreign partner withdraws or the competitor comes with a better product ,possibly at a cheaper cost which is quite usual in high tech products.The other important factor is the delay associated with trials , acceptance of high end products and mid course correction made in QR by the user. You may be aware of many examples where the equipment purchased from abroad fail to comply with the specifications Negotiation process in such cases are too difficult and time consuming . Whereas,for any indigenously developed item by DRDO or PSU,we have much better access to design and technology.
    The primary reasons for lack of initiative from Indian manufacturers to take up major defence items are two- firstly, existing technology and future development of it, is simply beyond the reach of Indian industries and secondly, no industry in private sector can tolerate the unavoidable delay associated with manufacturing,test and induction of any high-tech defence item. Both criteria can be met only by Govt owned organisationsHence this argument will prove that it is not possible to manufacture and supply high-tech defence products by Indian industries even with 49% FDI.
    The solutions:a) make our OFs and PSUs more efficient b) provide impetus to the industries to improve technology base to attract FDI Regards

  8. For getting state of the art technology in the defense sector, if we think that by allowing FDI as majority stake in the private sector, we shall be able to get it, then we are all living in a fool’s paradise.
    Because foreign firms will always be under the control of the country of origin. Such firms will backtrack at the time of need by the slightest blink of the country of their origin.
    Our only way out is to drastically re- organise the DRDO to a very professional level with accountability. We shall have to admit that our military industry is having a relatively short history unlike other western industrial power. Military armament industries have evolved with time with lot of past experience to fall back upon. I feel if we persevere with our present efforts studiously , things will definitely look up in near future. We have already seen that in certain sectors. Projects like Kaveri engine should under no circumstances be abandoned at halfway stage. Though it is faced with time and cost over run, the experience of evolution of such a complex programme will come to our benefit in the future. This is also a fact that on many a occasion even in advanced countries certain projects do face with problems and their ultimate product does not come up to expectation. Most important thing is that we need to have the research organisations with professional approach and missionary zeal. Government also will have to support them without any undue interference which are seen in some other places.

  9. I hope author reads these comments. If you do Major than please read this article and on your next article please give examples as the following article shows. Thank you.

  10. Excellent in depth insight into the issues that plague the largest single element in the country’s budget expenditure Mindless and obdurate bureaucrats ridden with fear psychosis have stifled the growth of the local industry,starved the Defense Services of much needed equipment, fed inefficient public sector manufacturing and allowed a behemoth like DRDO to carry on Even with the latest decision to allow 100% FDI in Defense will not change things unless many of these rules are changed

  11. The matter is not that simple. Agreed that India needs substantial FDI in the Defence Sector, but not at all costs. The issues raised by the author have been examined at several fora during the last two decade. The foreign conglomerations are so powerfully entrenched in the field that invitation to them to have the decision making position calls for abundant caution. A nation must retain its sovereign authority. Also, the defence related technologies are moving so fast that to remain on the their frontiers as also to maintain smart inventory is no less costly in real terms than making down the table payment for picking up systems from the shelf. I wish the author had given some available case studies of successful stories of limitless FDI investments in developing nations to add value to his article. All the same an invigorating write up.

    • Shriman Dr Sharmaji the fears expressed by you of foreign entrenchment ( where?) and “their take over ” in the event of some crisis are similar to what was expressed by the neosayers when the economy was liberalised in the early 90s The rest is history This is one of the reasons for the paranoia and the resultant inaction First of all foreign defence manufacturers will invest in this country if it is attractive for their shareholders which mean a fair environment ,a reasonably good market and freedom to operate No one will come in with even 100% FDI if their hands are tied behind their back and the rules are one sided Why should they ? Lastly, we are not a banana republic to be taken over by these companies

  12. Very lucid article in simple language. All issues have been clarified. I had many doubts earlier but now I am convinced that FDI is urgently required. Send this article to defence Minister to read and understand. Thank you IDr.

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