Sunday, October 17, 2010

FDI Limit in Defense Sector- An Indian Perspective

There has been an animated debate on the need to boost Foreign Direct Investment (FDI) in India’s defence sector which has not been in a position to meet the diverse requirements of the Indian defence forces owing to the lack of financial resources, technological expertise and advanced manufacturing base. While some consider FDI to be an alluring option for giving impetus to the domestic defence sector, there is also a view that the entire issue is “sensitive and controversial” in nature. This implies that a balance must be struck between increased FDI flow and national interest. India could institute a policy framework to encourage foreign participation in terms of financial investment, technological sharing, manufacturing expertise and marketing skill to not only meet the  domestic requirements but also to cater to the export market. It will also give the much required impetus to the defence PSU's for improving the quality of their products to survive in the market. Also as an exporter of defence hardware, India would be in a position to expand its sphere of influence. According to the recommendations of the report that was present in the parliament on ‘Indigenisation of Defense Production-Public Private Partnership’, the allocation limit of FDI i. e. 26 per cent may increase on a case to case basis to the proposed 74%. 
It was in 2001 that the Indian defence sector opened up for private participation, with the FDI limit capped at 26%.  The Indian Parliament’s Standing Committee on defence has proposed raising the FDI cap to 49%. Similarly, many industry bodies have made a strong case for increasing the FDI limit in the Indian defence sector with a view to boost defence hardware production capability. But without a level playing field it would be impossible to attract a higher level of FDI into the Indian defence sector. After all, foreign companies willing to invest in the Indian the defence sector will expect benefits, such as purchase guarantee, open access to other markets, control of production capacity, production range, etc. at par with their Indian counterparts. While formulating a policy aimed at boosting FDI in the Indian defence sector, this issue needs to be addressed. The Indian Defence Ministry is opposed to the idea of boosting the FDI limit in the Indian defence sector on the grounds of “security concern.”   Whether Indian Defence Minister A.K. Antony’s overdrive for self reliance in defence production is a major hindrance in the way of boosting FDI, one is not sure. 
The security concerns mentioned earlier are quoted according to the policy released on internet as- 
(i) In times of operational emergencies like wars, the companies might shut down and choke the supplies to the armed forces. 
(ii) Non sharing of the important technologies by making an assembling plant of imported goods. 
I think our policy makers do not know about the concept of 'Global Factory'. A company sets up plants of various functionalities in different regions to draw the maximum benefits of each in terms of cheap labour, abundant raw materials, etc. that they offer. When a defense company invests in any country, it makes it an integral part of its production chain. A sub assembly produced in India might be exported to other manufacturing facilities, integrating the factory in production cycle. In that case, it won't be easy for the company to shut down any facility and disrupt the worldwide production network. Also, no one can shut services without notice and adequate safeguards must be taken while issuing license. 

An increased FDI flow into the defence sector has the potential to decrease imports in which the role of agents and middlemen have been conspicuous. The private Indian industry is split in opinion when it comes to increasing the FDI limit. Some see it as an opportunity to expand their businesses by entering into joint collaboration with foreign giants, and some see big defense companies like EADS, Lockheed Martin, Boeing, etc., as a threat to their business. Small and medium enterprises will welcome the entry of foreign companies though, as enormous opportunities will be htrown at them. But this division in though of the private players have led to the absence of one voice while lobbying for such a drastic measure as increasing FDI limit beyond 50%. 
Defense PSUs import sub assemblies under the garb of technology transfer. Almost 70% of the defense requirements are fulfilled by either imports or purchase of such sub assemblies to make sub standard equipments which they call indigenous! As things stand now, India’s defence manufacturing base leaves much to be desired. For instance only three Indian enterprises—Hindustan Aeronautical Ltd (HAL), Bharat Electronics Ltd and Ordnance Factory Board (OFB) make it to the list of top 100 defence outfits in the world. It is obvious that the Indian Defence Ministry has a strong bias towards state owned enterprises. But it is high time that the Indian Defence Ministry transforms its image of being partisan to state owned enterprises. Industry sources say that the Indian Defence Ministry should support research and development in private sector industries through a variety of measures including appropriate incentives. This step along with an increased FDI flow in phases could galvanize the private sector to increase the quantum of resources and time to develop futuristic weapons systems that Indian defence forces are keen on acquiring.