100% FDI In Defence Boon or Bane
The Indian aerospace and defence market is among the most attractive globally. India ranks among the top 8 countries in the world in terms of military expenditure and has established itself as a prime importer of defence equipment.
One of the largest armed forces in the world, India also has the dubious distinctions of arming its forces with obsolete equipment. On a very conservative estimate, only 15 per cent of the equipment is considered to be state-of-the-art, 35 per cent is just regular issue and 50 per cent is grossly out-dated and needs immediate replacement. Today, almost 75 per cent of India’s defence services and hardware needs are coming from abroad. It is the world’s largest importer of arms, ammunition and other defence equipment. Unless, India produces futuristic weapons and state-of-theart technologies, the regional geo-strategic power play will not be in India’s favour for long. In the present geo-political set up in the Indian subcontinent, India cannot simply afford to spend more and wait endlessly expecting its defence PSU units to produce the arms we need. This will never happen.
The state run military establish Defence Research and Development Organisation (DRDO), Hindustan Aeronautics Limited (HAL), and National Aerospace Laboratories (NAL) have been underperformers for long. We have failed miserably in the indigenous defence projects like Tejas, Advanced Light Helicopter and the Arjun Main Battle Tank. Gas Turbine Research Establishment (GTRE)’s Kaveri engine took 20 years to build, but it failed in the high altitude tests and was ultimately scrapped.
So, politics apart, the decision to allow full investment in defence is a much needed relief to the Indian military establishment. Defence requirements are certainly a catalyst for inventing a whole host of downstream materials, products and equipment. However, for an effective production line, it has to attract dynamic and motivated draw researchers, scientists and engineers. Indian universities have failed to produce a rich pool of talent domestically. The shortage of qualified scientists and engineers, something Homi Bhabha had warned about when he put together the nuclear establishment in the late 1940s, has come to haunt Indian defence R&D and industry. Blame it on brain drain or lack of state-of-the-art facilities, but it has failed to attract local talent.
Subsequent Indian governments had tried to implement defence indigenisation, be it through local procurement, technology transfer from other nations or licensed to produce equipment. It is an established truth that no developed nation will transfer critical or cutting edge technology or science, especially in defence. Only secondary level technology will be shared.
During the previous UPA rule, the BJP had aggressively opposed increasing FDI in defence, without knowing the consequences. Modi’s NDA government is now in a hurry to perform miracles in defence manufacturing by way of resetting the policy formulations. Soon after he took charge, he increased the level of FDI in defence, but there were hardly any takers. Trade bodies like the ASSOCHAM had asked the government to allow 100 per cent FDI to attract investment in this sector. The contention of the trade bodies was that many developed countries have witnessed a big boost in their defence sector and industry after allowing 100 per cent participation.
The government’s recent decision to permit 100 per cent FDI in Defence sector was necessitated due to poor response of foreign investors for the previous scheme. It will give boost to the domestic defence industry, which is highly capital intensive, and save valuable foreign exchange since India imports 70 per cent of its defence equipment. In the new policy, FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions. This move has invoked immediate response from defence majors like Boeing, Dassault, BAE Systemsand Saab, who have allexpressed interest to set up shop in India. However they are not comfortable in joint ventures with state run units like HAL, DRDO, GRTE etc. They are keen to tie up with private players like the Tatas, Reliance or Mahindra.
The State run defence PSU’s will have a tough competition with theseglobal defence giants. What has to be seen is whether these companies actually transfer the technology along with their product. Foreign companies would never give us their latest and best technologies.
Defence production needs long-term and large investment, cutting-edge technology with low economies of scale. This industry is unique as the only single buyer, the government, is also the regulator that lays down procurement procedures. Hence, active government support in all areas is essential. This is also borne out by global experience – the private defence industries in the US, Europe, Israel, Brazil, Mexico have the full support of their respective governments.
Modi’s NDA regime will have to assure support to the private players with proactive policies. These sops will have to be by way of soft rate funding for R&D, creating a low-interest regime to bring down capital costs, buffering the disadvantages of exchange rate fluctuationsand encouraging exports to achieve economies of scale.
The present day defence industry is dominated by the PSU’s and ordnance factories which contribute about 90 per cent of the total domestic manufacturing output. The 41 ordnance factories are spread across 26 different locations and employ close to 1,25,000 people. These factories manufacture a wide spectrum of products from small to large calibre weapons, ammunition like mortar bombs, grenades, signalling smoke, rocket bombs, demolition, explosives, propellants and chemicals, armoured and transport vehicles, clothingand general stores. About 6000 MSMEs operate across the country supply components and sub-assemblies to the ordnance factories and the DRDO.
In 2012, the then Army Chief General V.K. Singh had written a letter to PM Manmohan Singh, lamenting the sorry state of affairs plaguing India’s defence sector. He wrote, “our tanks are out of ammunition, the air defence is obsolete and infantry is short of critical weapons.” A few days later, in an article written by Rahul Bedi, the plight of our defence preparedness was highlighted. Bedi wrote, “India’s night-fighting capability is virtually non-existent. Over 70 to 75 per cent of its armour fleet is incapable of operating in the dark. For the last three years, the army has not fired a single 9 mm carbine because it does not have the ammunition. The army has not conducted practice firing on its tanks – as it does not have ammunition. Artillery rounds too are in short supply. The Indian Army is using air defence guns from the 1950s. It has not updated any of them, which were inducted soon after independence.”
Defence procurement during the UPA regime was riddled with allegations of corruption, middlemen and bureaucratic hold ups. The UPA era was marked by policy inertia, procurement paralysis, and administrative fumbling; it has brought India’s defence preparedness to its lowest point since October 1962. Over $100 billion of hardware purchases had been stalled for a decade and has resulted in the degradation of the military’s fighting capability. Despite 10 years at the helm, the UPA has made little movement on the recommendations of the Kargil Review Committee, and Antony has effectively ignored the Naresh Chandra Review Committee’s report.
The naysayers for Modi’s 100 per cent plan point out that it puts the national security at risk and makes it vulnerable to foreign powers. Once foreign nations or entities dominate the defence production scenario of the country, they will hold the keys and may decide to shut down or down scale production during an internationals crisis. The other corporate fear is that joint ventures will stifle the fledging indigenous defence industry. While developed and militarily strong countries like the USA and Germany are cutting down their FDI and encouraging local industries, the route taken by India will be detrimental in the long run.
However, India has to take lessons from the Chinese. Post 1962, both India and China were evenly paced as weapons importers, however today China is the fourth largest exporter of arms. It has a thriving and growing defence manufacturing industry, and produces some of the cheapest arms worldwide. The increase in the FDI cap will certainly benefit and strengthen our defence. Moreover, we have to simultaneously develop our indigenous industry, improve R & D and reduce our dependence on foreign investors.
by Anil dhir