FDI in Defence

Dr Ashwani Mahajan
The effort to raise cap on FDI in defence from 26 percent, which started during UPA regime in 2010 and was put off after strong opposition from the then defence minister A.K. Antony, is once again being pushed vehemently after new government under Narendra Modi has come to power at the centre. It is notable that permission for FDI to the extent of 26 percent was first granted during the previous NDA Government under the stewardship of Atal Bihari Vajpayee. According to Press Note-4 in the year 2001, this policy was first announced, whereby Indian companies were allowed 100 percent and foreign entities 26 percent in defence sector.
After Narendra Modi’s swearing in as Prime Minister on May 26, 2014, talks have started to raise the cap on FDI in defence beyond 26 percent. According to the talks in Government circles a cabinet note to this effect has already been sent to the concerned ministries. Government says that today 70 percent of our defence equipment needs are being met by imports and hardly 30 percent by domestic production. Our ordinance factories use primitive techniques and therefore quality of our defence products is not up to the mark. The major problem about the defence equipments being imported into India is that suppliers are not in position to provide sufficient maintenance facilities. Therefore, these equipment are not very reliable during war. Therefore, in the interest of modernisation of our defence industry, its further exposure to FDI may prove to be a boon.
However, critiques argue that by allowing FDI in defence, our dependence on foreigners will increase. It is feared that our dependence on some countries and their blocs may amplify in the future. They also argue that during war time foreign companies, while trying to serve the strategic interests of their countries of origin, may even block the supplies at the time we require them most. This is also possible that they produce arms and ammunition in India and supply to our enemy nations or even terrorist organisations.
Why does Government want FDI in Defence?
It is believed that at present foreign companies are reluctant to transfer their technology with the present cap on FDI at 26 percent; as they want greater share in the business. If we raise the limit beyond 26 percent, they may be willing to transfer technology related expertise to India. Not only that this would improve technological base for defence industry, other sectors would also be benefited due to improvement in technology. Defence goods could be produced with in the country and therefore it would help us in saving valuable foreign exchange. Liberalisation of FDI in this sector may also help us in increasing our exports of defence goods. Today India exports hardly 2 percent of its defence production, whereas other countries including China, Israel, South Africa etc. export much more than India.
Truth of Technology Transfer
Those in favour of FDI in defence, give the argument that with this measure nation will get hold of latest technology in defence and nation would progress in the field of defence production. But this is an open secret that technology denial regime is at work in advanced nations, and USA in particular, who is known to possess advance technology in the field of defence production. Example of cryogenic engine is well known to all in which case USA not only refused to supply cryogenic engine for our PSLV programme itself, they even forced other nations also, not to give the same. US law does not permit its companies to make their technologies available to other countries, even if they are carrying out production activities in these countries. Therefore, if we open our doors for FDI in defence even further, technology transfer is not guaranteed.
What is Good for the Nation
It is known to all that today India is excessively dependent on other countries for supply of defence equipments, arms and ammunition fighter, aircrafts etc. Not only that it causes a big drain on our valuable foreign exchange, we are also forced to pay much higher prices through our nose. After the disintegration of USSR, today India is purchasing defence goods on a large scale from USA, Western Europe and host of other countries. Therefore theoretically the nation can benefit by inviting global players, as they may produce these defence goods with their latest technology and may serve our needs. However giving them managerial control in this strategic sector may not be good for the strategic interest of our country. Segments in which private or public sector companies are working efficiently; inviting foreign players may not be good. There are number of success stories of domestic producers.
Major worry with regard to foreign investment is that of mindset of the policy makers, who feel that foreign investment is the solution to every problem. The basis for deciding whether or not country should go in for FDI in defence should not be how much investment is attracted by this act, rather it should be based on the fact that how much help it would provide for self reliance in the field of defence, technological upgradation and strategic preparedness.
Reality remains that after independence, there have been major efforts in the field of defence production; however they were generally concentrated in the public sector. Further, there were insufficient efforts towards research and development. Where ever Government made efforts, we could achieve excellence. For instance, development of Agni missiles, nuclear deterrent, PSLV, satellite launching; have been astounding the world. Therefore it is imperative that Government takes up pro-active approach towards research and development activities for technological excellence based on Indian genius. At present there is no provision with regards to isolating Chinese investment, while going ahead with foreign investment, government has to adopt cautious approach.
No doubt nation cannot wait indefinitely for encouraging defence production at home, but at the same time, strategic interests too cannot be sacrificed. Therefore a guarded approach is the need of the hour. There is no reason for haste in this matter.
( The author is Associate Professor, PGDAV College, University of Delhi)

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