FDI in Defence: A case study

[~ Vaishnavh N (CS11B026)]


The past and the present

Nearly fifteen years ago, India’s defence manufacturing was thrown open to the private sector, allowing 100% equity with a cap of 26% on FDI. Three years from then, in 2004, the then Defence Minister eventually realized and announced that this had not encouraged  any FDI proposal in that span of time. In fact, India has not seen more than 5 million US dollars of FDI inflow in the defence industry, in the whole of the past decade. Subsequent attempts at raising the FDI cap was only always received with protests.  Moreover, most of the defence policies that India has followed has been inherently dissuasive for investors. As an example, arms and ammunitions could only be sold to the Ministry of Defence; any sale to other organizations of security in our country required the Government’s approval.

Things, today however, have taken an interesting turn, with the Cabinet approving a raise in the FDI limit on the defence sector to 49% (originally proposed for a raise to 100%), with an interest to boost the domestic industry where 70% of the military equipments are currently imported. India imports $8 billion worth defence equipments  and exports only about $183 million, annually!  

The stakeholders in the system have raised a spectrum of opinions on what this move entails. How does this affect India’s development? How does this help the nation’s security? The views have been two-sided as is the case of any development-related national decision.

Expecations 
The biggest promise that has been made is that this will upgrade our military capabilities manyfold, in a short span and with lesser money. Further, this might better tackle the dying manufacturing sector (whose yearly output has gone down to 0.2%) and the exploding defence budget which is growing at 13.4%, thanks to inflation. Big international firms are expected to set up their facilities in India with greater confidence, promoting competition and boosting business.

A risk to security 
One of the points put forth by the critics, in this light, is that the FDI hike will be detrimental to national security itself. In fact, the former Defence Minister A K Anthony, feared that all the Indian manufacturing companies involved in defence, might eventually be controlled by foreign MNCs who are in turn held by the reins of “bigger powers”. He added that while India has shrewdly avoided siding with any of the military blocks  by being strategically independent, a relaxation in the FDI limit might allow foreign powers to have a say on the defence-related joint venture programmes that India has forged with powerful countries like the US.



Many questions were raised along these lines. Will this make India dependent on external powers for defence research needs?  What if sensitive security-related information becomes accessible to these foreign stakeholders who further release it to our enemies?

The counterargument provided is that the existing system itself faces this issue that is being purported to be a drawback of FDI.  That is, the 70% import of equipments in the defence sector is an equally insecure technology transfer. In fact, when we install production units within the country thanks to FDI, we might be able to have agencies that monitor their production to ensure adequate security. This will further insulate ourselves from imposition of embargos on supplies by other governments. Interestingly, embargoes imposed by countries like America is a greater problem when we rely on imports; when development happens within India, without any import, we might still be able to carry forward production activities as the technology will be in our hands to use, ours to develop and ours to make.

The Chinese Model
The other point that critics of this hike resort to, is the example of China - our development-rival and neighbour that has grown many strides in defence with no foreign access. The  mistake in this claim is that the two countries, India and China, have totally different approaches in defence. India wants to develop/manufacture technology with foreign support while China on the other hand, is mass producing technology by trying to replicate foreign technology found elsewhere.
The idea of development is more long-winded than that of replication and takes more time to reach the target. Take for example, the LCA programme (Light Combat Aircraft) ; contrast this against China’s J11, a copy of the Russian Su-27 jet fighters. (Such examples are not rare.)

An assault on domestic players
Meanwhile, other players in the system have different concerns. The Centre of Trade Unions opposed the 100% FDI in defence sector because they believed it would be detrimental to indigenous production.

The counterargument to the claim by CITU, is that bureaucracy, corruption, rivalry and excessive regulation have taken a toll on the the performance of indigenous industry which has not been upto expectations. This brings us to two of the advantages of FDI that has been described in one of our earlier posts on FDI: it provides access to resources and superior technology that'll otherwise require extensive, time-consuming research and it improves competition, encouraging domestic counterparts to perform better.

For example, the FDI in defence will invite tough competition to our own research agencies like DRDO (Defence Research and Development Organization). DRDO has “51 laboratories, 5000 scientists and 25000 other personnels” who keep its research running. Despite the crores of money that have been spent on this institution, it is said that one of its best achievements is the mere reverse engineering and indigensiation of some imports, much the same as what China majorly does. Whatever progress that is made, often comes late, and the defence services eventually use only outdated equipment.  Thus, public sector undertakings have performed poorly despite huge sums of investment on them. Most of its production thrives only because of infusing transferred technology - with no meaning to indigenous competence at all!

Many critics of FDI even go to the extent of citing India’s huge budget and state that India is capable of affording defense imports, and foreign fund is unnecessary. However, FDI is not just about acquiring funds. India badly needs latest technologies! Welcoming foreign investment in our land would mean access to state-of-the-art surveillance technology that has been proved and tested for its capabilities by many other countries already. At the same time, a competitive atmosphere will be created for agencies like that of DRDO, which is expected to result in a win-win situation. There’ll be a positive  feedback cycle wherein FDI upgrades domestic technology, which attracts more foreign investment and thus better technology.

The different caps
The point that we miss amidst all this debate is that, not every investor will be able to gain complete power once they open production or research units in our country. This comes from the fact that it is incorrect to apply a single cap for a sector like defence that is extremely vast. There are different caps based on different interests: a 49% cap on those who do not transfer technology; 74% for those who do transfer technology; and a 100% on those manufacturing state-of-the-art technology. [4] This can be expected to ensure both cutting-edge global defence technology and the simultaneous growth and fostering of indigenous industry.

FDI has the potential to raise all bars in the defence industry. Extrapolating from one of the points mentioned in our other post on its role in development, FDI in defence is greatly expected to reduce the burden on our foreign exchange by replacing our defence imports. Producing latest technology in our own land is seen to be more promising than purchasing it as it is for exorbitant prices. The new government’s move is seen as a kick-start for our independence in manufacturing in defence sector. The outcome is ours to see in the coming years.

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