Raising FDI in Defence – Not lucrative by itself
The Defence Research and Development Organisation had identified some 15 critical technologies that it seeks to import through offsets, such technologies would require special approvals by the foreign vendor’s government
FDI IN THE DEFENCE sector has been hiked from erstwhile 26 per cent to 49 per cent. The increase in FDI was definitely warranted considering that we are importing over 70 per cent of our defence needs. What needs to be examined is whether such a measure by itself will adequately address our lack of self-sufficiency in defence. Why is it that while the FDI Confidence Index of the country per se is very high, that in the defence sector it is extremely low? Why is it that despite having 26 per cent FDI in defence sector for the past so many years, this barely attracted less than $5 million foreign investment; just 4.94 per cent in last 14 years. Analysis of these reasons would indicate that unless these issues are addressed, further hike of FDI to 49 per cent may just be utopia towards self sufficiency.
Similarly while the establishment of a Facilitation Cell by the Defence Offsets Management Wing (DOMW) is a welcome development, it needs to be remembered that the DOMW was preceded by the Defence Offset Facilitation Agency (DOFA) that was established in 2006 but had to be shut down as it could not deliver upon what was expected. The Defence Research and Development Organisation (DRDO) had identified some 15 critical technologies that it seeks to import through offsets, such technologies would require special approvals by the foreign vendor’s government. Till 2012, 16 offset contracts, worth $4.3 billion, were signed and this is expected to cross $25 billion by 2020. Why the DOFA failed was because we could not streamline procedures - cut the red tape and did not integrate all stakeholders when reviewing our policies. The Facilitation Cell may not achieve the desired objectives unless the reasons for failure of DOFA are eliminated. The same is applicable to FDI in defence sector. Take the annual fanfare with which the Defence Procurement Policy (DPP) is trumpeted for having been ‘simplified’. How come despite years of in-house ‘simplification’ of the DPP by the Ministry of Defence (MoD), It has failed to sufficiently attract even the indigenous private sector? The explanation is actually very simple. This cannot be rectified by the MoD by themselves, which they have failed to do over the years. Isn’t it imperative that all stake holders are integrated in reforming defence related policies and procedures, without which raising the FDI limit is unlikely to provide significant dividends.
A large cross-section feels that in case of transfer of technology (ToT), the FDI limit could well have been raised to 70 to 80 per cent. The hike of 49 per cent FDI has hardly seen foreign investors making a beeline to India. Then, this does not really affect sale of whole weapon systems to India by US, Russia, EU etc, which will likely continue if the hiked FDI would not attract foreign investors. Take the case of developing the medium-lift military aircraft. With HAL not allowed to participate, which foreign company would like ToT to an Indian firm that has no expertise in aircraft manufacture, when not even permitted to retain control? So, the hike to 49 per cent falls very much short of expectations of foreign companies who would like to undertake a JV on Indian soil but would like to retain control and protect their commercial interests beyond fulfilling needs of the Indian miliatry. With the poor state of our defence-industrial complex, the need of the hour is to make the Indian defence sector unambiguously lucrative for investors. This will unlikely happen with the 49 per cent hike. The danger is that if foreign investors are not attracted to invest in India and share defence technology, we will continue to take recourse to import whole weapon systems, which suits the arms mafia with attenuated massive financial gains. Under his chairmanship of Dr (later President) APJ Abdul Kalam in 1995, a Review Committee had set the goal of 70 per cent self-reliance in defence sector by year 2005 but today in 2014 are we not still just about 30 per cent self-reliant? Have we examined why this equation has not changed in last 19 years (1995 to 2014)? Obviously, this has happened because the powers that be, in concert with the arms mafia, did not want it to change because of high level corruption and financial gains.
Our DPP is still not conducive enough to facilitate and absorb foreign technology because it has ignored time required by foreign firms, accommodate procedure of concerned country for exports, requirement of government-to-government negotiations, as required and the like. Then, achieving selfsufficiency cannot be looked at by opening up to private sector while ignoring the dire need to restructure the MoD and the DRDODPSUs-OF etc. Defence Production (MoD) Joint Secretaries and Secretaries of MoD being on the Boards of all PSUs has not helped. To add to this are the startling facts in CAG reports of recent years indicating crores of rupees and efforts have simply gone down the drain without accountability. The DRDO hierarchy themselves admit that despite the fact many years and lakhs and crores of rupees invested, they only have ‘patches of excellence’ to show. The hard fact is that unless professional military expertise is injected at all levels in MoD and similarly without users (military) inducted at all levels of control and management in DRDO-DPSUs-OF, not much improvement are possible.
Issue of recent regulations relaxing requirement of licence to produce a large number of components and sub-systems required in fighting equipment other than heavier battle field systems like tanks, armoured vehicle, aircraft and warships, and relaxing control on the dual use items with both defence and civilian applications are welcome steps. There is encouragement in R&D too, example being that for developing prototypes for a BMS for the Army, government will foot 80 per cent of the costs. However, the bottomline is that Indian firms do need foreign investments and foreign technology, but 49 per cent FDI is unlikely to attract foreign investors. The Department of Industrial Policy and Promotion (DIPP) has been batting for 100 per cent FDI in case of the investing foreign partner willing to make available state of the art technol- ogy and 74 per cent in case of the transfer of technology that is not cutting edge. Now that the 70 per cent self sufficiency target has been pushed to year 2020, the indigenous defence industry has to play a major role, as would the FDI since the total estimated products required would be to the tune of $80-$100 billion, since by the end of the Fourteenth Five Year Plan, the cumulative capital expenditures over 2012–27 are projected to exceed $235 billion. In absence of attracting desired level of FDI, government may eventually need to go by the DIPP recommendations.
Firing of the M777 A2 howitzer