100% FDI in defence: How Modi can strengthen India against China, Pakistan

The biggest and the most immediate fallout from Prime Minister Narendra Modi’s visit to the United States should be this: India allows 100 per cent FDI in defence. This is the crying need of the Indian armed forces, neglected for decades, if the national security issues have to be redressed hundred per cent.

The sooner this is done, the better. In the US, PM Modi had extensive and formal discussions with at least 17 captains of American corporate world and chatted with many more in a more informal set-up. Many of the American corporate honchos Modi met happen to be giants in the defence industry.

Incidentally, Modi had gone to the US after his government had raised the FDI (Foreign Direct Investment) cap in the defence sector from 26 to 49 per cent. But this is just not enough and Modi was conveyed this in as many terms by the American industrialist czars. They wanted 100 per cent FDI in defence, to begin with.

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Right now, the Indian armed forces are in a state of pitiful neglect. Billions of dollars would be required to put the national security back on rails. If all the pressing needs of the three armed forces - the army, the navy and the air force - were to be met fully, the nation would require funds in excess of $100 billion.

And this has to be managed within the next three or four years, not decades, if India has to bolster its defence and come up with a credible and effective deterrent vis-a-vis China and Pakistan.

A developing country like India cannot generate this kind of money on its own. In fact, no developing country can afford to do so, barring one: China. And China is already doing this with an annual defence budget of over $ 188 billion, compared to the Indian defence budget of $47.4 billion as per the 2013 figures.

In fact, one needs to look at the top ten countries of the world with highest military expenditures for better clarity in this context.

According to a SIPRI (Stockholm International Peace Research Institute) Fact Sheet of April 2014, the top ten countries in terms of their defence budgets in 2013 were as follows: the US ($640 billion) China ($188 billion), Russia ($87.8 billion), Saudi Arabia ($67 billion), France ($61.2 billion), UK ($57.9 billion), Germany ($48.8 billion), Japan ($48.6 billion), India (47.4 billion) and South Korea ($33.9 billion).

Modi’s favourite punch line for attracting foreign investments - “no red tape, only red carpet” - is just not enough. Modi has to go beyond the rhetoric and after 140 days in office he has to walk his talk. His recently concluded US visit should be an eye opener in this context.

In fact, even allowing 100 per cent FDI in defence won’t be enough. It would just be a signal that India is ready for foreign investment in a sensitive sector like defence. It would be a firm indication that India no longer treats the defence sector as a holy cow.

Consider the highly capital intensive defence projects that India needs to complete in double quick time to bolster its defences: the China-specific mountain strike corps ($11 billion), the MMRCA (Medium Multi Role Combat Aircraft ($13 billion), the FGFA (Fifth Generation Fighter Aircraft, a joint venture with Russia with at least $2 billion as India’s cost share to begin with), the submarines project (which will cost minimum of $10 billion or so), and the artillery modernization project ($4 billion).

This totals to $40 billion and pertains to only a handful of big-ticket defence projects. There are dozens of other defence projects waiting for implementation, held up for either want of funds or technology or both.

Any serious attempt by the Modi government to deliver on the pressing requirements of the three armed forces will have two prerequisites: money and technology. Both these challenges can be effectively met if the government embarks on the 100 per cent FDI in defence route, to begin with.

But, as stated before, this alone won’t be enough. Any prospective foreign investor would bring in his money into India only if he is hundred per cent assured that his investment will be worth it.

For this, the Modi government will have to drastically change the archaic rules and create a business-friendly environment. The argument that India has a strong and a stable government won’t be enough insurance may be valid in context of the Modi government but it won’t lead to foreign investors loosening their purse strings.

The Modi government will have to think big and act fast. Even after allowing 100 per cent FDI in defence, the government will have to persuade foreign investors to come and invest in India.

It is high time that the Modi government came up with not one but several Special Economic Zones (SEZ) exclusively for defence. The foreign investors will have to be wooed with liberal laws and business-friendly conditions like liberal tax holidays. India does not have a single SEZ exclusively for defence at present.

Indian private companies specialising in defence will have to be encouraged to forge tie-ups with leading foreign companies on a much bigger scale than presently. Only then will PM Modi’s “Make in India” campaign will truly produce results.

The writer is a Consulting Editor for Firstpost and a strategic analyst who tweets @Kishkindha.