The ma­jor global in­vestors seek­ing to make large in­vest­ments in the de­fence sec­tor are un­likely to find the change to be a sig­nif­i­cant de­par­ture from the past


Barely 48 hours af­ter the ver­dict in the elec­tions in the state of Bi­har that were some­what unin­spir­ing for the BJP, the Modi-led NDA Gov­ern­ment at the Cen­tre ap­pears to have gone into a des­per­ate over­drive to shift fo­cus de­ci­sively from the hu­mil­i­at­ing po­lit­i­cal de­ba­cle to the na­tional econ­omy. This is one area where the ma­jor­ity of the pop­u­la­tion con­tin­ues to have high hopes of de­liv­ery by the gov­ern­ment. On Novem­ber 10, the gov­ern­ment un­veiled a new frame­work of reg­u­la­tions for for­eign direct in­vest­ment (FDI) into as many as 15 sec­tors of the in­dus­try in In­dia. There has also been an ef­fort to sim­plify pro­ce­dures to en­hance the ease of do­ing busi­ness in In­dia. The high de­gree of dif­fi­culty en­trepreneurs have al­ways been con­fronted with while try­ing to set up busi­ness in In­dia has in­deed been a ma­jor im­ped­i­ment so far to the growth of the in­dus­try in In­dia es­pe­cially of the de­fence and aero­space sec­tor.

Some of the im­por­tant sec­tors pro­claimed to be cov­ered by the re­cent de­ci­sion on FDI are in­fra­struc­ture de­vel­op­ment, broad­cast­ing, civil avi­a­tion, agri­cul­ture, plan­ta­tion, man­u­fac­tur­ing, sin­gle­brand re­tail, pri­vate sec­tor bank­ing and even de­fence. The tim­ing of this an­nounce­ment was sig­nif­i­cant as it came on the eve of the visit of Prime Min­is­ter Naren­dra Modi to the United King­dom. This step by the gov­ern­ment is timely as it would cer­tainly help boost the pro­file of In­dia glob­ally as an in­vest­ment des­ti­na­tion. It is un­der­stood that this de­ci­sion on FDI was taken in a hurry, with­out scru­tiny of the pro­posal by the Cab­i­net, which will now be ex­pected to pro­vide ex-post facto sanc­tion. (See Box for ex­tract of Press Note of re­vised FDI re­lated to the de­fence sec­tor.)

In the cap­i­tal-starved in­dus­try in In­dia, FDI is gen­er­ally seen as be­ing a panacea for most if not all the ills plagu­ing the in­dus­try. Soon af­ter com­ing to power at the Cen­tre in May 2014, Prime Min­is­ter Modi em­barked on a ‘Make in In­dia’ cam­paign with the ul­ti­mate aim of cre­at­ing a strong de­fence in­dus­trial base. FDI in the de­fence sec­tor be­ing an es­sen­tial pre­req­ui­site for this man­date, as a first step, the gov­ern­ment raised the limit of FDI from 26 to 49 per cent sub­ject to scru­tiny only by the For­eign In­vest­ment Pro­mo­tion Board (FIPB). Un­der the UPA regime, FDI be­yond 26 per cent re­quired clear­ance by the Cab­i­net Com­mit­tee on Se­cu­rity. To that ex­tent there was some for­ward move­ment. Prime Min­is­ter Modi how­ever, was de­ter­mined to en­sure that In­dia shed its im­age of be­ing one of the largest im­porters in the world of weapon sys­tems.

With the changes im­ple­mented soon af­ter tak­ing over, the NDA Gov­ern­ment had hopes that for­eign in­vestors would ex­ploit the op­por­tu­ni­ties In­dia had to of­fer across a wide range of in­dus­trial ven­tures, the de­fence in­dus­try cer­tainly be­ing one of the most lu­cra­tive. Data on FDI tabled in the Par­lia­ment in July 2014 had in­di­cated that in the de­fence sec­tor, in the pre­ced­ing seven months, only six pro­pos­als for in­vest­ment in the de­fence sec­tor to­talling to merely $15 mil­lion (`97 crore) had been re­ceived. Of the six pro­pos­als, only two of them had reached the up­per limit of 49 per cent. The in­ten­sity of re­sponse to the op­por­tu­nity of FDI in the de­fence sec­tor in In­dia can be as­sessed when the size of the in­vest­ment pro­posed to be made un­der this scheme in 2013-14 is viewed against the size of the con­tracts for mil­i­tary hard­ware con­cluded in the pre­ced­ing 10 years that was val­ued at $60 bil­lion (`3,90,000 crore).

Un­der the re­vised pro­ce­dure an­nounced on Novem­ber 10 this year, the only mean­ing­ful change that has been in­tro­duced is that FDI up to 49 per cent in the de­fence sec­tor would be per­mit­ted un­der the ‘Au­to­matic Route’. This im­plies that the need for scru­tiny and clear­ance by the FIPB that was in­tro­duced in mid-2014, has been dis­pensed with. How­ever, pro­pos­als for FDI be­yond 49 per cent would still have to be cleared by the FIPB. The ma­jor global in­vestors who would be de­sirous of seek­ing to ex­er­cise a de­gree of con­trol over their in­vest­ments in In­dia and hence would per­haps pre­fer in­vest­ments higher than 49 per cent, are un­likely to find the change to be a sig­nif­i­cant de­par­ture from the past. Some of th­ese com­pa­nies have even de­scribed the changes made to be ‘cos­metic’. The gov­ern­ment needs to do much more to really strengthen the in­dige­nous de­fence in­dus­trial base.


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