Defence Industry

Hiking FDI in Defence Aimed At Drawing in Active Foreign Participation
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Issue Net Edition | Date : 18 May , 2020

Announcing the fourth tranche of the economic package, Finance Minister Nirmala Sitharaman revealed three important government decisions related to defence. These include corporatization of the Ordnance Factory Board (OFB), hiking Foreign Direct Investment (FDI) in defence and banning certain imports where indigenous capability exists.  It was clarified that corporatization of the OFB does not imply privatization. This is not the first time that government has attempted to corporatize the OFB. Arun Jaitley as Finance Minister too made some moves in this direction but gave up in face of stiff opposition by employees unions aligned with various political parties. The renewed decision for corporatizing the OFB would have to seen how it is implemented; the form it takes, the time schedule and whether it is holistic or more of lip service.

The hike in the FDI limit in the  defence sector to 74 per cent from the existing 49 per cent automatic route is a measure to tide over the economic slowdown in view of the COVIDE-19 pandemic lock down is good. In fact, this hike in FDI should have happened much earlier without waiting for the virus breakout to hit our economy. When the Modi government first came to power in May 2014, it hiked the FDI limit from 26 percent to 49 percent in defence equipment manufacturing, and also announced the ‘Make in India’ campaign to encourage Indian industry to take over some sections of manufacturing which were being imported. The Parliament also approved FDI in defence sector beyond 49 percent on case-to-case basis where Transfer of Technology (TOT) was involved, apparently for state-of-the-art products.

While raising the FDI in defence from 26 percent to 49 percent we possibly did not analyze what level of FDI would make the defence sector lucrative for foreign companies. The day after 49% FDI in defence sector was announced during the budget session of 2014, Ulrich Grillo, the visiting President of Federation of German Industries met our Defence Minister and later told reporters that German Industries would not like to invest in India since with 49 percent FDI they would not have control over selling the products. The result has been that as of December 2019, the total FDI inflows in India’s defence sector in the last five years remained at a low of just $2.48 million and total FDI inflows in the last two decades (April 2000 to December 2019) which too remained at abysmally low level of just $8.82 million (Rs 52 crore).

It is pertinent to note that even before 2014, the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry had been recommending 74 percent FDI in case of ToT and 100 percent FDI in case of making available state of the art technology. For reasons best known this was not considered by policy makers but the flip side is that if at least 74 percent FDI in defence sector was then permitted, say in aerospace, would it not have accelerated development of the Tejas fighter with more production lines established through joint ventures (JVs)? Same goes for other equipment including helicopters, transport aircraft, weapon platforms and other defence equipment.

Hiking the FDI limit to 74 percent will definitely attract foreign firms  and provide a boost to the ‘Make in India’ initiative. However, it would be prudent to also take a closer look and review/refine related  issues for making defence sector more attractive to foreign firms, where required. These would could include issues like: criteria for choosing strategic partners; whether all wholly-owned subsidiaries of foreign companies qualify as Indian Offset Partners (IOPs) and individual notification for the same published; Technology Perspective and Capability Roadmap (TPCR) in vogue; changes needed, if any in Draft Defence Procurement Procedure (DPP) 2020 by way of procedures including the Fast Track Procedure (FTP), and; Technical Oversight Committee (TOC) mechanism etc.

Current developments also demand we seriously examine why despite China’s roguish behavior and the Wuhan Virus, foreign companies are preferring to relocate to countries like Vietnam and Indonesia, not to India. We may like to take solace from President Trump wanting US companies like Apple to get back to America, but that would amount to hiding the real issue. Without effectively making India attractive, the talk of three, five or whatever trillion economy will just be duping ourselves. No doubt hiking the FDI limit to 74 percent itself will increase FDI from the dismal levels till now. But with increased FDI and foreign firms senior partner in JVs, two issues will need to be streamlined: one, blocking FDI by China in defence sector ‘at least’ till the border is settled, demarcated and China demits to ‘One India’ policy, and; when control is with foreign entities, they should not sell products and transfer technology to our adversaries.  

The Finance Minister announced ban on the imports in the defence which can be made in India. She also mentioned convergence of maintenance and repair operations (MRO) which are important to all business including defence, also tweeting separately wherein she wrote, “Major engine manufacturers in the world would set up engine repair facilities in India in the coming year. Convergence between defence sector and the civil MROs will be established to create economies of scale.” These again are good steps.  In terms of defence acquisitions, the list for equipment where imports will not be allowed since indigenous products are available has been identified. Where indigenous products are not available or development years away, essential imports will obviously continue.

At the same time there is need to lay down a time-table for indigenization, without which we will land up in the same rut as earlier with vested elements continuing imports and surreptitiously delaying indigenous production and advancements. We may recall that in 1995, a Review Committee, headed by Dr Abdul Kalam had directed that India must meet 70 percent of its defence needs indigenously by 2014. But we did not move an inch forwarded, as was discovered 19 years later in 2014. Yet, no heads rolled and we haven’t moved much beyond 2014 as well including in ‘Make in India’ despite this being the priority of the Prime Minister.   

There is no doubt that ban on defence imports will give a boost to indigenous defence firms like L&T, Bharat Forge, Bharat Electronics, BEML and the likes. But two issues the government needs to consider: one, will the orders already booked by indigenous companies like these be allowed to go through and if not,   the financial impact on this account on them, and; two, parts and components by such companies import for their products – will these be permitted or they need to look at indigenous sources available but not in collaboration, which may cause disruptions.

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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

Lt Gen Prakash Katoch

is a former Lt Gen Special Forces, Indian Army

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