Pseudo-swadeshi defence

The Budget proposal hiking foreign direct investment limit in defence manufacturing from 26 to 49 per cent seems pragmatic at first glance. On the one hand, it recognises the need for FDI in a sector that is both capital- and technology-intensive. On the other, the 49 per cent foreign ownership cap ensures Indian management and control, regarded as necessary in addressing national security concerns. The reality, however, is that the 26 per cent cap permitted since 2001 has helped attract neither capital (cumulative FDI flows amount to less than $5 million) nor technology. Increasing this to 49 per cent makes no material difference from a control and management standpoint. It is doubtful whether any global original equipment manufacturer would want to license proprietary technology to a company where it has no powers to even block ordinary resolutions — which is possible only with a minimum 50 per cent holding.

More specious is the ‘national security’ argument against higher FDI limits in defence. Currently, India meets an estimated 70 per cent of its defence hardware requirements through imports. There is no reason to believe that a company producing from a facility within India and governed by Indian law should pose an inherent threat to national security merely because it is foreign-owned. This threat, if at all, should be more from imported equipment. Moreover, FDI in defence is subject to industrial licensing. The Government can insist on background checks and impose additional security measures, both at the time of investment approval and also via regular inspections of the manufacturing site.

A rigid cap-based FDI policy makes no practical sense for a country with an annual defence capital outlay of over ₹90,000 crore ($15 billion), much of which is a drain of precious foreign exchange. The sensible way forward is to permit up to 100 per cent FDI on a case-to-case basis, conditional upon the investor bringing in state-of-art technology and establishing a manufacturing facility leading to a certain minimum level of indigenisation. After all, this is an industry amenable to ancillarisation. Most leading global arms-makers are basically system integrators and are likely to outsource requirements — from castings, forgings and precision machining to sub-systems and assemblies — domestically. With rising manufacturing costs in other countries, India can position itself as a production hub that could service the requirements of other armed forces apart from its own. But for this, we should be open to allowing more FDI and be less paranoid about the risks of doing so.

COMMENT NOW