Home 100 Percent FDI in Defence: Can it Help India Become an Arms Producer?

100 Percent FDI in Defence: Can it Help India Become an Arms Producer?

The recent policy announcement of a 100 percent limit in FDI in the defence sector is another turning point in India’s quest for self-reliance in arms production. For long, the industry and the business sector in India and abroad have been demanding unlimited access to foreign investments in defence sector on the same lines as it exists in other sectors. Many aspects of the demand have been debated since the limit was raised to 49 percent last year. The new policy initiative, along with the not so old Defence Production Policy and Defence Procurement Procedures(DPP) should bring cheers to foreign companies willing to invest in India while retaining their management control. However, an unlimited FDI limit is just one of the many steps needed to convert the Government’s initiative of ‘Make in India’ into a successful campaign and propel India’s quest for self-reliance in arms and weapons production.

As India starts its tryst with higher category defence production with FDI in ‘modern technology’, it would be looking for technology transfer and production splurge at cheaper rates. Given the sensitiveness in the defence sector and huge development costs, it would be difficult to convince foreign companies for technology transfer to their Indian off-springs. Therefore, some policy initiative is also required towards an easy, accessible and flexible technology transfer policy. An added incentive could be an attractive defence exports policy wherein foreign companies are allowed to export unlimited portion of their weapons production. This is how the Chinese FDI policy worked successfully in the ‘four modernisations’. Further, such a policy would create more jobs in the domestic market.

Critics might also vent their pessimism about the pace at which India can become a ‘technology powerhouse’. Not long back, China was the largest arms importer of the world with a major share of its armoury coming from Russia and Israel. However, despite allegations of ‘reverse-engineering’ and technology thefts, the Chinese have managed to copycat a significant portion of foreign technology and today they are producing almost all of China’s weapons requirement and even exporting it to many Afro Asian countries at dirt cheap rates. India needs to learn from the Chinese experience!

The quest for technological self-reliance also necessitates improvement in DRDO’s working. Despite consuming 6 percent of defence budget, there is little engendering of domestic technology in higher category. Equally dismal is the performance in patenting and marketing of in-house technology. The recommendations of the Rama Rao Committee need to be implemented in totality to push the DRDO on a constructive roadmap rather than allowing it to continue as a monolithic organisation producing technology already available off the shelf in the world.

Similarly, the defence PSUs and ordnance factories need overhauling for a meaningful contribution to the domestic Military Industrial Complex (MIC). So far, neither have they been able to feed the weapons requirement of the armed forces nor  have theymade any significant exports despite a huge amount of cash flow and functional autonomy. They need to step up from monopoly to competition; from departmental mindset to corporate behaviour and overall from a liability on public finance to ‘value for money’arrangement with the Government. The Kelkar Committee’s recommendation of corporatisation of ordnance factories, if implemented, could have strengthened the domestic MIC. Since considerable amount of public money stands invested in them, the next set of policy reforms must propel them to ‘perform or perish’.

It is also desirable to revamp the June 2014 industrial licensing policy in which many segments are excluded from the purview of foreign companies setting up production ventures in India. There is space for further rightsizing the list without any compromises on national security. A similar review is warranted for the offset policy where very little in-flow of cash has taken place despite streamlining the procedure and institutionalisation of Defence Offset Facilitation Agency (DOFA).

The international arms market is sluggish with few countries opting for high cost weapons import. India is not only an exception, but is also likely to remain the largest arms importer in the world for considerable period. Professional surveys by KPMG  has shown huge demand from Indian Government for weapons procurement. The survey findings seem to be correct since the Government of India has placed almost Rs 90,000 crore worth orders in last two years and plans to spend at least Rs 1,00,000 crore more in the near future. The new FDI policy would encourage many foreign companies to set up base in India since they would benefit from the ‘buy Indian’ category in the DPP and enable the country to make substantial savings on foreign exchange.

The new FDI policy,supplemented with other above mentioned policy reforms, has the potential to create a simplified production environment like better bargaining leverage for Government, lesser cost of purchases, reduced influence of international trading factors like fluctuating rate of dollar and above all, lesser hassles of the Rosonborough syndrome (costlier and fluctuating supply of spare parts). 


The Author is in the Indian Defence Accounts Service.Views expressed are personal.

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Bhartendu K Singh

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