100% FDI in Defence is good move


Government has announced that FDI in the Defence Sector is permitted to 100% level. Till now, the FDI regime permitted 49% FDI participation in the equity of a company under automatic route. Foreign investment beyond 49% has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to ‘state-of-art’ technology in the country has been done away with. FDI limit for defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959. It may be recalled that when the FDI in defence was hiked from 26% to 49% when presenting the Defence Budget for FY 2014-2015, that time too the Parliament had approved consideration of FDI in defence beyond 49% on case to case basis where state-of-the-art equipment was involved. However, last year news trickled in that all the cases of FDI in defence were stuck with the Foreign Investment Promotion Board (FIPB) because the MoD had still not defined what was meant by ‘state-of-the-art’.

While hiking the FDI from 26% to 49% in 2014, the government perhaps did not have enough time to examine why with 26% cap for FDI in defence had fetched less than $5 million FDI in last 14 years – a mere 4.94%. Had this been done, it would have been deduced that 49% FDI cap is not going to be enough. The fact is that we have a glut in technology and critical voids, which need imports. Even the Tejas fighter though termed indigenous after years of development has some 80% components and assemblies that are imported. To obtain high end technology while foreign firms are eager and we can leverage our strategic and defence partnerships to facilitate the JVs, this certainly warranted FDI far greater than 49%. It may be recalled that immediately post the announcement of hike of FDI in defence from 26% to 49% in 2014, Ulrich Grillo, President, Federation of German Industries visiting India told reporters that German Industries would not like to invest in India since with 49% FDI they would not have control over selling the products.

In March this year, Arbus chief expressed similar sentiments, which is common to most foreign investors. In fact Airbus India chief specifically pointed out that Airbus Group is keen to replicate joint development and manufacturing model as in other countries but “49% holding curb wouldn’t encourage the big companies to come to India”. The media reports that FDI inflows into the country increased to $55.46 billion in 2015-2016 as against $36.04 billion during 2013-2014, which is the highest in any financial year. But the point to note is that FDI in defence defence the aggressive push for ‘Make in India’ failed to attract foreign investors, totaling to just Rs 56 lakhs in 2014-2015 as brought out by the MoS (Defence). Significantly, for past several years, the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry had been recommending past several years 74% FDI in case of transfer of technology (ToT) in cutting-edge and 100% FDI in case of state-of-the-art (read high end) technology. Obviously, such recommendations were being made after thorough study and analysis. It is to the credit of the Modi government that a bold decision has been taken to increase the FDI in Defence Sector to 100%. This will certainly give the required fillip to ‘Make in India’ as well as boost defence exports. What needs to be ensured is that while the DPP 2016 is implemented in true letter and spirit, cases of FDI in defence ‘through the government’ route are also processed speedily – cutting out the red tape in both cases. 100% FDI in defence will be a big boost for ‘Make in India’ in defence. The push for state-of-the-art defence equipment indigenization is vital with current The Indian Military’s current equipment holdings are 50% obsolete and multiple critical voids exist because of sustained neglect over the past decade plus. The proportion of state-of-the-art equipment also needs to grow from its current level of 15% to at least 30% with the current cycle including acquisitions drafted under the long-term integrated perspective plan (LTIPP), which is expected to include procurements worth $100 billion by 2022. A holistic approach to equipping the military is the need of the hour.


Illustration: Anoop Kamath / SP Guide Pubns