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.