Defence Industry

FDI in Defence Industry
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Issue Net Edition | Date : 01 Jan , 2007

To make India a favoured destination for FDI in defence production, there is an urgent need for a total policy review. The Government has to first decide as to what its long term goals are and define the objectives by phases with time frames.

FDI in defence could either be in a Greenfield project or through merger/acquisition. Normally, developing countries attract Greenfield projects, whereas acquisitions/mergers are more prevalent in developed nations. India today stands at a threshold where both the options can be exercised.

Ideally, 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.

Image building is absolutely essential. Efforts to attract FDI through investment promotion have become indispensable. Investment promotion is generally defined as ‘activities that disseminate information about, or attempt to create an image of the investment site and provide investment services for the prospective investors’. Investment promotion in defence sector needs expert handling as investors are few and highly selective.

Almost all countries provide various forms of investment incentives as well. These include fiscal incentives like tax breaks/holidays and financial incentives like grants/loans. They are also offered market preferences. It is equally essential to give maximum publicity to the incentives being offered. India should leverage its technical manpower against foreign technology.

Recommended Policy Framework

As discussed earlier, India’s primary aim of inviting FDI in defence is to import much needed technology which would not be available otherwise. If that be the case, it stands to reason that the policy be tailored towards achieving that aim. Therefore, India should have a graduated policy which is technology specific.

The policy must be a flexible one to attract frontier technology. Application of various clauses should be based on the type and level of technology being infused. For example, FDI in the production of radars, telecommunications, surveillance equipment, sensors, night vision devices, aero-engines, avionics, medium guns and such high-tech equipment should be facilitated by giving irresistible incentives. In case of cutting edge technology, FDI limit could be increased to 51 percent to instill confidence in the foreign entrepreneur that he would continue to own the enterprise by holding majority stake.

The Government must provide adequate freedom to a foreign investor to cater to market dynamics, albeit within the broad regulatory policy framework. He should not feel stifled or handicapped due to excessive monitoring by the bureaucracy. Restrictions on capacity should be relaxed so as to enable economies of scale. It will also reduce India’s procurement price. Import of dual use technology should also be encouraged as it benefits other segments of the economy as well.

Excess production should be permitted to be exported or sold elsewhere depending upon the lethality of equipment and the need to safeguard the technology. This aspect could be indicated in the licence itself to reassure the investor.

It is understandable that the Government can give no purchase guarantee at the time of issuance of licence. But it can certainly provide a level playing field to all. There should be no price/purchase preference for public sector units. They must be forced to participate in an open competition. It will compel them to upgrade and improve their functioning to survive.

Although offsets amounting to 30 per cent for contracts exceeding 300 crore rupees have been made mandatory in Defence Procurement Procedure-2005, detailed guidelines are yet to be issued. Infusion of FDI through technology transfer in joint-productions should be encouraged under offset obligations.

The Government should offer price and/or purchase preference to items produced in the country. This single step will make all foreign vendors examine feasibility of local production more seriously. Of course, local production has to be categorised in terms of value addition and technology transfer lest mere assembly/integration of imported sub-assemblies gets passed as local production.

Conclusion

FDI is a need based concept. The host nation needs funds and technology for its accelerated growth while a foreign investor is guided purely by economic considerations. Therefore, FDI policy should address all apprehensions of prospective investors and convince them that their genuine commercial interests would remain safe. They should be assured of fair market access for their products.

The Government needs to provide clear signals to the world that it welcomes FDI in defence. The policy for FDI in defence should be flexible and technology specific. The procurement policy should encourage local production. This could be in terms of price or purchase preference, depending upon the criticality of technology involved.

India has to offer economic opportunities which are more attractive than those of others competing for the same FDI. It is important to have a proper policy advocacy, image building and investor support facilities which are in consonance with the current international trade standards. Given its favourable geo-political position and technical man-power, India must strive to be a hub for global outsourcing and partner co-production of defence products as a part of multi-nation consortiums.

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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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