2% short: Raising foreign investment cap to 49% in defence is no game-changer

After initially being stalled by the previous government, the Cabinet has finally raised the ceiling for foreign direct investment in the defence sector from 26 percent to 49 percent under the condition that the control of any joint venture manufacturing defence equipment remains in the hands of the Indian partner.

Expectedly, stocks of domestic defence equipment makers gained with Astra Micro Wave Products Ltd gaining 2.7 percent, Bharat Electronics Ltd rising 2.3 percent and BEML Ltd rising 3.9 percent.

While the cap for FDI was raised to 26 percent in the sector by the UPA government, India continued to import almost 70 percent of its defence requirements and remained one of the world’s biggest defence equipment owners.

According to official statistics , between April 2000 to May 2014, India’s defence industry received just Rs 24.36 crore in FDI investments while in comparison the services sector received Rs 1.89 lakh crore in investments during the same period.

The new FDI limit has been set in the hope that it will give an impetus for foreign defence equipment manufacturers to set up base in India, but experts have their doubts.

Despite the incentives that the mandatory technology transfer may not be enforced, Amber Dubey, partner and India head of aerospace and defence at KPMG told the_Business Standard_ that the raising of the FDI limit may just create foreign partners who don’t have any role to play.

“The best option would have been allowing 74 per centFDIwith adequate checks and balances like domestic staffing, domestic value addition and controls over exports,” Dubey told the newspaper .

KPMG has suggested that it would be best to just allow global companies to set up shop in India with domestic staff manning it.

It’s not the first time the suggestion has been made given that the Indian defence industry still not manufacturing complex defence technology but is restricted to ordinance and other basic defence equipment.

In his column for Firstbiz , Raghav Bahl had accused the Indian government of being overly protective of the eight defence public sector undertakings and 42 ordnance factories and said that even Indian industry chambers have put their commercial interests over strategic concerns.

In an earlier column in The Hindu , Manoj Joshi had also pointed out how Indian defence firms lagged far behind global peers when it came to defence equipment manufacturing so far and even attempts at technology transfer hadn’t worked to give the desired result.

“Indian-made Sukhoi 30 MKI costs Rs 80 crore per unit more than those imported from Russia. The fact we are tying up to design the fifth generation fighter with the Russians indicates that there was little or no learning process involved in the indigenous manufacture of the Su-30 by the HAL,” he had written.

Joshi also pointed out in public sector units that had partnered with foreign firms had often worked in favour of the foreign partner, which anyway didn’t serve national interest.

Supporters of more FDI have argued that in a country where the government is anyway at present importing defence equipment without any major technology transfer, the doors may as well be completely opened to manufacturers so that it not only generates domestic employment but also provides for investment into the country’s defence sector.

The move could also result in greater reliability on supply of defence equipment in the event of war, pointed out Aakash Brahmachari in a piece for IPCS .

Writing in the Indian Defence Review , Major General Mrinal Suman had suggested FDI norms provide no real incentive for big defence manufacturers to enter the country and said that in order to attract big manufacturers there should even be a provision to allow 100 percent FDI for manufacture of highly complex equipment.

He pointed to the fact that the Defence Research and Development Organisation (DRDO) has failed to deliver on the expectations and even suggested that safeguards can be included with pre-conditions like being to take over manufacturers facilities in the event of a national emergency.

The opening up of the sector is a step ahead in a direction that is the result of years of lobbying in its favour. But if its critics are to be believed don’t expect a major impact just yet.