FDI at 49 per cent – a boon or bane?

The gov­ern­ment will have to find ways to achieve a bal­ance be­tween the need to in­spire for­eign in­vest­ment and the con­cerns of na­tional se­cu­rity

SP's MAI - - MILITARY FEATURE - [ By Air Mar­shal B.K. Pandey (Retd) ]

In 2001, as part of its ef­fort to un­shackle the In­dian econ­omy, the gov­ern­ment opened doors to for­eign di­rect in­vest­ment (FDI) into the In­dian de­fence in­dus­try. Since then, the limit of FDI in this sec­tor per­mit­ted had been pegged at 26 per cent and any pro­posal beyond this fig­ure would have to be con­sid­ered on case-by-case ba­sis and fi­nally ap­proved by the Cab­i­net Com­mit­tee on Se­cu­rity, a pro­ce­dure of for­mi­da­ble com­plex­ity that proved to be a de­ter­rent to po­ten­tial in­vestors. This decision of the gov­ern­ment was in con­for­mity with the In­dian Com­pa­nies Act, 1956. How­ever, as the in­vest­ment was limited to just 26 per cent and the pol­icy was bereft of any in­cen­tive for the in­vestor, it failed to in­spire any sig­nif­i­cant in­flow of in­vest­ment or state-of-the-art tech­nol­ogy that was an­tic­i­pated. The level of en­thu­si­asm dis­played by for­eign com­pa­nies for FDI into the In­dian de­fence in­dus­try is abun­dantly clear from the data of the last 14 years. Dur­ing this pe­riod, the to­tal quantum of funds re­ceived as FDI un­der this head by the In­dian de­fence in­dus­try was a pal­try $4.94 mil­lion!

Re-eval­u­a­tion of Pol­icy on FDI

The almost com­plete lack of en­thu­si­asm on the part of for­eign in­vestors about the In­dian de­fence in­dus­try com­pelled the gov­ern­ment to re-eval­u­ate the pol­icy on the sub­ject. The Min­istry of Fi­nance (MoF), in its eco­nomic survey re­port for the pe­riod 2008-09, strongly rec­om­mended that it was time to aban­don the ex­ist­ing cap at 26 per cent on FDI into the In­dian de­fence in­dus­try and that it be raised ide­ally to 74 per cent; in any case not less than 49 per cent. The re­port fur­ther stated that on a case-by-case ba­sis in strate­gic and high tech­nol­ogy seg­ments, FDI could be raised to 100 per cent to elim­i­nate de­pen­dence on im­ports. The re­port stressed the need to en­cour­age re­puted global aero­space and de­fence ma­jors to es­tab­lish man­u­fac­tur­ing and sys­tems in­te­gra­tion fa­cil­i­ties in the coun­try.

As a con­se­quence of this re­view, in July 2010, the then Min­is­ter of De­fence A.K. Antony in­formed the Lok Sabha that the Min­istry of De­fence had in fact been tasked to re­draft the pol­icy on FDI keep­ing in view the rec­om­men­da­tion of the MoF to raise the cap on FDI in the In­dian de­fence in­dus­try to 74 per cent. The de­bate over this is­sue in the in­dus­try that was in­tense and was fi­nally set­tled in June this year by the Con­fed­er­a­tion of In­dian In­dus­try (CII) that rec­om­mended that FDI above 49 per cent be al­lowed by the gov­ern­ment only on case-by-case ba­sis and that too when trans­fer of tech­nol­ogy was in­volved. The CII had ear­lier pro­posed FDI at 51 per cent and stated that 100 per cent FDI ought to be per­mit­ted in cases where the fin­ished prod­ucts are to be ex­ported and are not di­verted for in­ter­nal con­sump­tion.

Re­vised Pol­icy on FDI Ap­proved

Fi­nally on Au­gust 6, 2014, the gov­ern­ment cleared the pro­posal to raise the cap on FDI in the In­dian de­fence in­dus­try from 26 to 49 per cent. How­ever, the re­quire­ment for all pro­pos­als to have prior ap­proval by the For­eign In­vest­ment Pro­mo­tion Board has been stip­u­lated as a pre­req­ui­site. This pol­icy change is also ex­pected to be in sync with the thrust of the NDA Gov­ern­ment to make In­dia a global man­u­fac­tur­ing hub. This is be­ing pro­jected as a phi­los­o­phy of ‘Make in In­dia’ pro­posed by Prime Min­is­ter Modi. The In­dian de­fence in­dus­try has im­mense scope for for­eign in­vestors as for the last six decades the na­tion has been procur­ing over 70 per cent of its re­quire­ment of mil­i­tary hard­ware from abroad. The ef­fort to­wards the de­vel­op­ment of in­dige­nous man­u­fac­tur­ing ca­pa­bil­ity has un­for­tu­nately been piti­fully low.

Re­sponse from Po­ten­tial In­vestors

As per ini­tial re­sponses, the decision to raise the cap on FDI to 49 per cent has been wel­comed by the In­dian de­fence in­dus­try with the gen­eral belief that it will boost sen­ti­ment. Log­i­cally, higher FDI ought to ben­e­fit the in­dus­try in the ar­eas of de­sign, de­vel­op­ment and state-ofthe-art man­u­fac­tur­ing as well as build up a ro­bust in­dige­nous ca­pa­bil­ity to have pos­i­tive im­pact on the na­tion’s mil­i­tary ca­pa­bil­ity.

How­ever, the gen­eral view that is emerg­ing is that it might not lead to sig­nif­i­cant in­crease in in­vest­ments from abroad. As per the US-In­dia Business Coun­cil, “The decision to in­crease FDI in the In­dian de­fence sec­tor to 49 per cent is only an ‘in­cre­men­tal’ step and is un­likely to bring the much needed funds in this key area”. As the cap on FDI has been fixed at 49 per cent, in ef­fect, there is no qual­i­ta­tive change in the new pol­icy. So long as the FDI limit is kept at be­low 51 per cent, the new pol­icy would con­tinue to suf­fer the same lim­i­ta­tions that af­flicted the sys­tem when the FDI was limited to 26 per cent. While the im­per­a­tives of na­tional se­cu­rity have been ad­vanced as the jus­ti­fi­ca­tion for not trans­gress­ing the 50 per cent bar­rier, the per­spec­tive of the po­ten­tial global in­vestors must also be taken into ac­count.

With FDI in the In­dian de­fence in­dus­try limited to 49 per cent, the for­eign in­vestor will still have no man­age­ment con­trol of the joint ven­ture com­pa­nies as it will con­tinue to re­main with the In­dian part­ner. Per­haps the only ad­van­tage that the for­eign in­vestor will have is that with FDI at 49 per cent, he will be able to repa­tri­ate a larger share of rev­enue gen­er­ated by the joint ven­ture company. But a ma­jor dis­in­cen­tive for for­eign in­vestors of FDI cap at 49 per cent will be the is­sue of trans­fer of tech­nol­ogy es­pe­cially of the high-end va­ri­ety. The In­dian aero­space in­dus­try has gen­er­ally been en­gaged in li­censed pro­duc­tion and has failed to de­velop any mean­ing­ful ca­pa­bil­ity in this regime. Thus to be able to leapfrog into a bright tech­no­log­i­cal fu­ture, trans­fer of high-end tech­nol­ogy into the In­dian de­fence in­dus­try will be an in­escapable re­quire­ment. The gov­ern­ment will have to find ways to achieve a bal­ance be­tween the need to in­spire for­eign in­vest­ment and the con­cerns of na­tional se­cu­rity. In a sys­tem that is in the grip of de­bil­i­tat­ing bu­reau­cratic con­trol, this may not be an easy task. Hope­fully, as and when the NDA Gov­ern­ment and es­pe­cially Prime Min­is­ter Modi finds time to fo­cus on is­sues re­lated to the In­dian de­fence in­dus­try, the sit­u­a­tion may change for the bet­ter.

Global aero­space and de­fence ma­jors have de­vel­oped high­end tech­nolo­gies de­vot­ing years of ef­fort and at enor­mous costs. It would there­fore be un­rea­son­able to ex­pect them to trans­fer fu­tur­is­tic tech­nolo­gies to In­dia over which they have no con­trol so long as the limit of FDI is be­low 51 per cent.

Un­less this is­sue is ad­dressed with ob­jec­tiv­ity with fo­cus on core in­ter­ests of all stake­hold­ers, de­vel­op­ment of true in­dige­nous ca­pa­bil­ity will re­main a mirage!

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