Defence FDI reforms unshackle sector to make India a hub

With the increase in FDI, the government has made its intention clear that it wants India to be a regional manufacturing hub. Due to the current FDI restrictions, India was losing out on a number of foreign companies who were keen on developing India as a ‘home market’, to other destinations like South Africa, Mexico ,Morrocco, South East Asia etc. [caption id=“attachment_2846694” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] Foreign original equipment manufacturers (OEMs) were hesitant in coming forward to invest in the Indian defence market, with or without key technologies. This move will also promote technology transfer through the spillover effects of FDI, which are bound to occur when foreign wholly owned subsidiaries offer subcontracts to the domestic industry. It will also ease out the issue of fulfillment of offset obligations where the capacity of Indian Industry to absorb offsets was being questioned. With limited defence infrastructure and nonexistent exports, absorbing offsets worth $2-3 billion annually, was a challenge which had led to the ministry of defence increasing the offset threshold limit to Rs 2,000 crores. In the past, the Indian private sector has been raising objections to increase in FDI as they felt it could potentially lead to the crowding out of India’s domestic industry. However, it is felt that India’s massive modernisation programmes leave enough space for growth of both the domestic enterprises and foreign wholly owned subsidiaries. It can be said that even with 100 percent FDI, a few foreign companies will still prefer to establish a joint venture in India, to seek the benefit of the local knowledge and market access of domestic companies. The present removal of FDI cap is likely to be first exploited mainly by lower tier foreign defence suppliers, i.e. the Tier 3 and Tier 4 suppliers, who have been waiting in the wings. FDI limit for the defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959. However, obtaining a licence to manufacture still remains an issue here for all domestic manufacturers and will need to be resolved first before any benefits of increasing the FDI cap can be taken. The author is Director - Aerospace and Defence with PwC in India.