A Pragmatic Approach to Defence FDI

Context: While addressing industry gatherings, the Ministry of Defence  (MoD) officials have talked up the defence policy reforms instituted since 2014.

Defence policy reforms instituted since 2014

• Promulgation of a “negative import list”:  including 101 defence items, helps to the cause of Atmanirbhar Bharat.

• Establishment of defence industrial corridors: in Tamil Nadu and Uttar Pradesh.

• Liberalization of Foreign Direct Investment (FDI): by Department for Promotion of Industry and Internal Trade from 49% to 74% in September 2020.

• Categories include: “Buy (Indian designed, developed and manufactured)”, “Make-1”, “Make-2”, “Strategic partner” projects and development projects in collaboration with the Defence Research and Development Organisation. 

• Defence Acquisition Policy for 2020 (DAP-2020): Emphasizes on indigenization by restricting the control of companies participating in the tenders to resident Indian citizens. (reduced FDI to 49%)

Benefits of raising the defence FDI cap:

• Bring in cutting-edge military technology.

• Boost in defence manufacture: Helps in creating an eco-system of high-quality manufacturing units located in India.
• Creation of employment: and development of production skills.

• Heightened competition:  Indian private and public sector companies will compete for building international-quality products

• Dependence on imports: India imports 55-60% of its defence needs, much of it bought in single-vendor contracts from Russia, US, France and Israel.

Problems related to raising the defence FDI cap

• Dependent on Original Equipment Manufacturers(OEMs): Raising FDI may be inadequate since the defence industry is not market-driven and is OEM’s gets to choose the destination.

• Strategic concerns prevail: over economic logic.

• Lack of clarity: While the defence cap was increased from 49%-74%, DAP 2020 only recognizes Indian residents to hold more than 50% of ownership (under the control provisions of Companies Law 2013).

Conclusion: Direct procurement from abroad should be made conditional on setting up manufacturing facilities in India