FDI in the Indian Defence Industry
The major global investors seeking to make large investments in the defence sector, are unlikely to find the change to be a significant departure from the past.
Akash Surface to Air Missile
Brahmos Weapon System
Photo Credit: Dassault Aviation, Boeing, BAE Systems, PIB
Barely 48 hours after the verdict in the elections in the state of Bihar that were somewhat uninspiring for the BJP, the Modi-led NDA government at the centre appears to have gone into a desperate overdrive to shift focus decisively from the humiliating political debacle to the national economy. This is one area where the majority of the population continues to have high hopes of delivery by the government. On November 10, the government unveiled a new framework of regulations for Foreign Direct Investment (FDI) into as many as 15 sectors of the industry in India. There has also been an effort to simplify procedures to enhance the ease of doing business in India. The high degree of difficulty entrepreneurs have always been confronted with while trying to set up business in India, has indeed been a major impediment so far to the growth of the industry in India especially of the defence and aerospace sector.
Some of the important sectors proclaimed to be covered by the recent decision on FDI are infrastructure development, broadcasting, civil aviation, agriculture, plantation, manufacturing, single-brand retail, private sector banking and even defence. The timing of this announcement was significant as it came on the eve of the visit of Prime Minister Narendra Modi to the United Kingdom. This step by the government is timely as it would certainly help boost the profile of India globally as an investment destination. It is understood that this decision on FDI was taken in a hurry, without scrutiny of the proposal by the Cabinet, which will now be expected to provide ex-post facto sanction. (See BOX for extract of Press Note of revised FDI related to the defence sector).
In the capital starved industry in India, FDI is generally seen as being a panacea of most if not all the ills plaguing the industry. Soon after coming to power at the centre in May 2014, the Modi-led government embarked on a “Make in India” campaign with the ultimate aim of creating a strong defence industrial base. FDI in the defence sector being an essential prerequisite for this mandate, as a first step, the government raised the limit of FDI from 26 to 49 per cent subject to scrutiny only by the Foreign Investment Promotion Board (FIPB). Under the UPA regime, FDI beyond 26 per cent required clearance by the Cabinet Committee on security. To that extent there was some forward movement. Prime Minister Modi however, was determined to ensure that India shed its image of being one of the largest importers in the world of weapon systems.
With the changes implemented soon after taking over, the NDA government had hopes that foreign investors would exploit the opportunities India had to offer across a wide range of industrial ventures, the defence industry certainly being one of the most lucrative. Data on FDI tabled in the Parliament in July 2014 had indicated that in the defence sector, in the preceding seven months, only six proposals for investment in the defence sector totalling to merely $15 million (Rs 97 crore) had been received. Of the six proposals, only two of them had reached the upper limit of 49 per cent. The intensity of response to the opportunity of FDI in the defence sector in India can be assessed when the size of the investment proposed to be made under this scheme in 2013-14 is viewed against the size of the contracts for military hardware concluded in the preceding ten years that was valued at $60 billion ( Rs 3,90,000 crore).
Under the revised procedure announced on November 10 this year, the only meaningful change that has been introduced is that FDI up to 49 per cent in the defence sector would be permitted under the “Automatic Route”. This implies that the need for scrutiny and clearance by the FIPB that was introduced in mid 2014, has been dispensed with. However, proposals for FDI beyond 49 per cent would still have to be cleared by the FIPB. The major global investors who would be desirous of seeking to exercise a degree of control over their investments in India and hence would perhaps prefer investments higher than 49 per cent, are unlikely to find the change to be a significant departure from the past. Some of these companies have even described the changes made to be “cosmetic”. The government needs to do much more to really strengthen the indigenous defence industrial base.
Para 2 of press note on FDI