Disappointing figures for FDI in defence indicate that a greater push is needed

According to Japanese firm Nomura, foreign direct investment (FDI) in India during financial year 2015 was to the tune of US$ 34.9 billion. This is a massive 61.6% jump from US$ 21.6 billion during 2014. According to the report, the FY 2015 inflows are 1.7% of GDP, up from 1.1% in the previous year. The obvious reason is India opening up to the world, remodeling its economic policies and in particular the ‘Make in India’ call given by Prime Minister Narendra Modi. The Economic Survey released on 27 February this year states that FDI in India has received a dramatic boost from the launch of the Make in India initiative, major objectives behind the Make in India being job creation and skill enhancement in 25 sectors of the economy, including automobiles, aviation, biotechnology, chemicals, construction, defence manufacturing, electrical machinery, electronic systems and mining.
After the September 2014 launch of ‘Make in India, there was an almost 40% increase in FDI inflows from October 2014 to June 2015 over a similar period in previous year. Entities from several countries like Japan, China, France and South Korea announced their intention to invest in India in various industrial and infrastructure projects. According to the Department of Industrial Policy and Promotion (DIPP): FDI inflows under the approval route (which requires prior government permission) increased by 87% during 2014-15 with an inflow of $2.22 billion; more than 90% of FDI was through the automatic route, and; during 2014-15, foreign institutional investment rose by an unprecedented 717% to $40.92 billion.

Representational image. AFP

Representational image. AFP

Under the Make in India program, the government has reportedly awarded 56 defence manufacturing permits to private sector entities in the past one year, after allowing 49% FDI in the defence sector in August 2014, compared with 47 granted in the preceding three years. Singapore, Mauritius, Netherlands and the US account for the major share of FDI inflows into India. Out of FDI equity inflows of $24.8 billion during 2015-16 (April-November), more than 60% came from Singapore and Mauritius.
However, when the figures of FDI in defence were laid down in Parliament on 29 April 2016, they were quite disappointing. The written reply given by Defence Minister Manohar Parrikar read, “The actual flow of foreign direct investment (FDI) takes time to mature. From August 2014 to February 2016, a total amount of Rs.112.35 lakh (Rs 1.12 crore) has come into the country as FDI in the defence sector”. This actually amounts to a pittance compared to the overall FDI coming in and the Make in India campaign. There is no doubt that funds flowing in through FDI are also suspect with ongoing investigations in the VVIP helicopter scam indicating possibility of bribe money of some Rs 100-120 crore having come through FDI. Significantly, the Economic Survey mentioned herein also states, “These inflows need perhaps to be examined more closely to determine whether they constitute actual investment or are diversions from other sources to avail of tax benefits under the Double Tax Avoidance Agreement that these countries have with India.”
Notwithstanding the above, there is a need to seriously examine why the defence sector has failed to attract FDI even in the backdrop that when the Modi government took over in May 2014, it hiked the FDI limit from 26% to 49% in defence equipment manufacturing, and also announced the ‘Make in India’ campaign to encourage Indian industry to take over some sections of manufacturing which were being imported. Significantly, the Parliament had also approved FDI in defence sector beyond 49% on case-to-case basis, obviously for state-of-the-art products. The hesitation of FDI in defence is because of multiple factors, as discussed in succeeding paragraphs.
-First, the DPP-2016 issued is incomplete: criteria for choosing strategic partners are not defined; whether wholly-owned subsidiaries of foreign companies qualify as Indian Offset Partners (IOPs) is not clear; detailed offset guidelines not notified; no changes mentioned to the Technology Perspective and Capability Roadmap (TPCR) in vogue in the past decade and a half which hasn’t helped much; no worthwhile changes in other procedures including the Fast Track Procedure (FTP); no changes in the Technical Oversight Committee (TOC) mechanism in terms of combining it with TEC or Staff Evaluation Committee and raising its threshold from the existing INR 300 crores as also dropping of the DPSU member as recommended by the defence private industry, and; chapter containing the revised standard contract document as well as various annexure and appendices has not been released.
-Second, just facilitating foreign companies to bypass government and the FIPB in finalizing defence investment deals is unlikely to suffice. The issues of IPR and the number and guarantee of what would be absorbed in India too need to be addressed.
-Third, The private sector continues to doubt the government’s resolve in providing a level playing field. Many of them cite example of the Army’s Future Infantry Combat Vehicle (FICV) project where fresh expression of interest (EoI) was issued in March 2014, yet four entities empanelled in 2010 were also included, which they feel was done only to accommodate the OFB. They visualize OFB being selected as one of the development agency, leaving just one remaining vacancy for balance private industry.


-Fourth, while Parliament approved FDI in defence beyond 49% on case to case basis in 2014, MoD has still to define what “state-of-the-art”. This is an atrocious state of affairs, which has only come to light when FIPB was questioned about the Tata-AugustaWestland JV to manufacture helicopters in India. Obviously all cases pertaining to FDI in defence beyond 49% are stuck because of the same reason.
So, when Defence Minister Parrikar told Parliament “The actual flow of foreign direct investment (FDI) takes time to mature”, it obviously includes the incompetent bureaucracy of MoD which is unable to define past two years what state-of-the-art implies. Can you have a better example of red tape, that too in backdrop of mounting criticalities of the military that includes a void of 1000 helicopters? In the past several years, the DIPP of the Ministry of Commerce and Industry has been recommending 74% FDI in defence in case of ToT and 100% FDI in case of making available state-of-the-art technology.


Clearly much more facilitation for Make in India is required. The government must also get on with the vital need to reorganize the higher defence set up, which is adversely affecting the defence of India. It is time to bring military professionals in MoD, as also having a defence secretary from outside the IAS, as recently suggested by Ashish Puntambekar, Designer, Defence Economic Zone Project through a letter to the Defence Minister, post his exasperating experiences with MoD bureaucrats. Revelations from the ongoing AugustaWestalnd helicopter scam also underline the urgent need for reorganizing the MoD.

The author is veteran Lieutenant General of Indian Army.

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to Firstpost.com/Whatsapp and hit the Subscribe button.

Updated Date: May 05, 2016 13:22:11 IST

Also See