FDI in Defence: Change is good

With a big hue and cry finally FM has increased the FDI in defence from 26% to 49%. With just having 6 weeks of governance, facing opposition and criticism from the economists it was definitely not a cakewalk for the NDA.

                                        India’s policy on FDI has always been a bureaucratic obduracy and perverse intransigence. Unwillingness to learn from the experience is another aspect that can be added to it. Considering the fact that FDI in defence was first mentioned in Budget 2001-02 with 26%, India has received less than $5 million inflow till today. The scenario was worst in 2004 when the then Defence Minister George Fernandes was forced to admit in the Lok Sabha that India had received no FDI proposal till that time. In 2010, the Commerce Ministry circulated a note recommending the raising of FDI cap to 74 per cent to encourage ‘established players in the defence industry to set up manufacturing facilities and integration of systems in India’. But again it was not in the interest of the country and Ministry of Defence (MoD) retained the 26 %. In May 2013, modifying his earlier proposal, Commerce Minister Anand Sharma suggested that the upper cap be raised to 49 per cent as a first step. It was again shot down by the MoD.

                                 There was always a need to increase the FDI percentage but there were some of the myths or perception that India was struggling with. Now, NDA has increased the FDI percentage, this article jots down the major myths that NDA government has put aside.

Myth One: Increasing FDI percentage a threat to national security

                                  Apprehensions were being made that during operational emergencies, foreign investors can show their back at us, shut their factories and choke their supplies to the armed forces.

But the irony is that India is procuring all critical weapon systems produced/integrated abroad till today. It was not understood as to how India’s security would get threatened if the same weapon systems would be produced/integrated in India.

                                   As regards dependability during crisis situations, no foreign investor can risk loss of his total investment by shutting down his production facilities. Further, all major defence equipment producers follow ‘Global Factory’ concept, wherein various manufacturing functions are spread over a number of locations in different countries.

                                  Most importantly, adequate safeguards could have been incorporated while issuing licenses. India could have reserved the right to take over the licensed facility under certain extraordinary circumstances of national emergencies. Most nations include such an enabling provision then why not India. Fears expressed were totally unfounded and highly exaggerated.

Myth Two: Indian policy was highly investor friendly and did not require any changes

                                  According to the UPA and previous government MoDs FDI in defence (26 %) was highly investor friendly and required no changes. However, if we look by the investor company perspective, there was nothing for them till now. Management would be under the control of India, the CEO had to be Indian resident and a foreign investor could not transfer his equity before the expiry of license.

                                  Oddly, India expected a prospective foreign investor to be excited by such an asymmetrical policy wherein he was expected to invest his resources in a venture where he had no significant control, faced strict capacity/product constraints, no purchase guarantee and had no open access to other markets (including exports). It defied logic. Such a lop-sided policy can never attract FDI.

                                The new budget has definitely a lot to offer. The outcome will definitely get unwrapped in couple of months and the list of investors taking interest in it. There is a need of retrospection in every sector. Every budget in every year promises in the same way but the execution. With a new government and the famous ‘Achche Din’ let’s hope the execution proves the mettle on the people’s expectation.

This article is written by Kumar Prashant, a PGDM student of 2014 batch  He  can be reached at pgp14085.prashant@iimraipur.ac.in"