IIPM Mumbai Campus
An increase in the FDI cap in India's defence sector will not only bring revenue and state-of-the-art technology, it will also pave way for India's self-sufficiency in defence production.
For a country such as ours which spends billions of dollars every year to import nearly 70 per cent of its total military equipment, the Indian government seems stuck with the country’s defence establishment still reluctant to lift the 26 per cent cap on Foreign Direct Investment (FDI) in the “sensitive” sector of defence production. Despite India being one of the biggest users of conventional defence equipment and the cumulative defence budget growing at the rate of over 13 per cent annually since 2006-07, we continue to depend on imports for all our major requirements with domestic production limited to low technology items and based on purchased
technology.
In a discussion paper floated last year seeking stakeholders’ views, the Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce, had favoured 100 per cent FDI in defence in order to attract foreign technology. It further called for an urgent need to enhance the deterrent and the operational capabilities of the armed forces. The paper stated that almost 50 per cent of India’s defence equipment was suffering from obsolescence while merely 15 per cent could be called state-of-the-art.
The government, however, now seems to be keen on allowing greater participation of the private sector and expert players in the defence sector to invite higher technology in the sector. With strong backing from both the Finance and Home Ministries, the Ministry of Commerce and Industry is learnt to be preparing to move a Cabinet note on increasing the cap on FDI in the defence sector to 49 per cent.
The case for a firm government stand on increasing the FDI cap is backed by the fact that it is of vital importance to the defence sector which is highly capital intensive where technology requires frequent upgrading. FDI is not just a subject of getting funds, but also facilitates access to the latest technologies and provides for a long term commitment between the foreign and local enterprise. It creates a sort of a cycle where the foreign investment upgrades local technology which, in turn, attracts more FDI with higher technology.
“Defence sector needs huge investments and anyone doing so will not be looking for 26 per cent of stake,” observes senior Defence analyst Maroof Raza. “If we really want path breaking technologies to come to India, we will have to raise the stake of Foreign Direct Investments up to 74 percent,” he adds.
Despite the presence of such alluring factors, Minister for Defence A. K. Antony has registered his stern disagreement with the said proposal on the ground that the Indian defence sector was not mature enough to absorb higher FDI. The reluctance of the defence establishment, sources say, is also based on the rather conventional belief that defence is a sensitive sector and that opening doors to foreign players could lead to security concerns.
The defence sector in India, which was initially subject to 100 per cent monopoly of the public sector, saw the government open doors to private participation and allow 26 per cent FDI following a policy change over the last decade. However, the policy move did not really help matters as it failed to amuse both the domestic private sector and the Foreign Direct Investors. Over-dependence on the public sector has been cited as one of the major reasons for this failure. Also, the complete lack of enthusiasm by investors, both Indian and offshore, failed the basic aim of allowing FDI in the defence sector, which was to pool capital and foster technology partnerships to manufacture defence equipment for the armed forces and also register its presence in the export market on a significant scale.
On a global front, India’s defence exports have ranged between 1.5 and 2.4 per cent of the total production. It is disappointing to note that ever since the introduction of FDI in defence in 2001, the grand total of investments in defence through the FDI route have been a meagre $15 million. As per the Budget Estimates (BE) for the year 2010-11, the defence sector has been allocated Rs 1,47,344 crore, an increase of 3.98 per cent over the BE of 2009-10. The expected defence spending over the next five years is $50bn.
Another case for strong legislation in favour of the proposed hike is also based on the fear that our vast dependence on imports can be stifled in times of crisis, leaving India defenceless. Considering that India needs to import even basic stuff, FDI can be kept out of areas which are really sensitive. In fact, the DIPP discussion paper had allayed concerns that India-based fully foreign-owned companies may not be in the county’s security interests, arguing that the concerns remained even in case of direct imports and hence could not be cited for opposing higher FDI.
Maroof, on the other hand, believes that there is no question of security being compromised. “Whether it is the 126 Medium Multi-Role Combat Aircraft or the Artillery Guns, we are procuring them from outside,” he says, adding, “Once the companies set up their base in India it will benefit the country.”
With India emerging as a major economic destination for several sectors, the efficient management of funds allocated in the defence budget will be of vital importance keeping in view its targets of reducing dependence on imports. What India needs today is a dedicated and technology specific policy which is flexible enough to attract frontier technology within the broad regulatory policy framework. It is vital that in the case of cutting edge technology, FDI limit be increased to 51 per cent to instil a sense of confidence in the foreign entrepreneur that he would continue to own the enterprise by holding majority stake.
An FDI cap of 49 per cent may prove totally unfruitful and could also pose as a major hurdle towards attracting high-end investments. Supporters of higher FDI say foreign investors will set up units in India that should lead to cheaper prices of defence equipment, secure supplies and steady jobs for Indians.
For India to sustain its steady economic growth and support it with a robust defence base, we need to offer opportunities which are more striking and attractive than other Foreign Direct Investors (FDI) competitors. In order to have a strong defence industry base in India, it is vital to recognise the peculiarities of the defence sector with investor facilities in line with prevailing international standards backed by proper policy support which override the dissuasive incongruities present in the sensitive sector of defence production.
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An increase in the FDI cap in India's defence sector will not only bring revenue and state-of-the-art technology, it will also pave way for India's self-sufficiency in defence production.
For a country such as ours which spends billions of dollars every year to import nearly 70 per cent of its total military equipment, the Indian government seems stuck with the country’s defence establishment still reluctant to lift the 26 per cent cap on Foreign Direct Investment (FDI) in the “sensitive” sector of defence production. Despite India being one of the biggest users of conventional defence equipment and the cumulative defence budget growing at the rate of over 13 per cent annually since 2006-07, we continue to depend on imports for all our major requirements with domestic production limited to low technology items and based on purchased
technology.
In a discussion paper floated last year seeking stakeholders’ views, the Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce, had favoured 100 per cent FDI in defence in order to attract foreign technology. It further called for an urgent need to enhance the deterrent and the operational capabilities of the armed forces. The paper stated that almost 50 per cent of India’s defence equipment was suffering from obsolescence while merely 15 per cent could be called state-of-the-art.
The government, however, now seems to be keen on allowing greater participation of the private sector and expert players in the defence sector to invite higher technology in the sector. With strong backing from both the Finance and Home Ministries, the Ministry of Commerce and Industry is learnt to be preparing to move a Cabinet note on increasing the cap on FDI in the defence sector to 49 per cent.
The case for a firm government stand on increasing the FDI cap is backed by the fact that it is of vital importance to the defence sector which is highly capital intensive where technology requires frequent upgrading. FDI is not just a subject of getting funds, but also facilitates access to the latest technologies and provides for a long term commitment between the foreign and local enterprise. It creates a sort of a cycle where the foreign investment upgrades local technology which, in turn, attracts more FDI with higher technology.
“Defence sector needs huge investments and anyone doing so will not be looking for 26 per cent of stake,” observes senior Defence analyst Maroof Raza. “If we really want path breaking technologies to come to India, we will have to raise the stake of Foreign Direct Investments up to 74 percent,” he adds.
Despite the presence of such alluring factors, Minister for Defence A. K. Antony has registered his stern disagreement with the said proposal on the ground that the Indian defence sector was not mature enough to absorb higher FDI. The reluctance of the defence establishment, sources say, is also based on the rather conventional belief that defence is a sensitive sector and that opening doors to foreign players could lead to security concerns.
The defence sector in India, which was initially subject to 100 per cent monopoly of the public sector, saw the government open doors to private participation and allow 26 per cent FDI following a policy change over the last decade. However, the policy move did not really help matters as it failed to amuse both the domestic private sector and the Foreign Direct Investors. Over-dependence on the public sector has been cited as one of the major reasons for this failure. Also, the complete lack of enthusiasm by investors, both Indian and offshore, failed the basic aim of allowing FDI in the defence sector, which was to pool capital and foster technology partnerships to manufacture defence equipment for the armed forces and also register its presence in the export market on a significant scale.
On a global front, India’s defence exports have ranged between 1.5 and 2.4 per cent of the total production. It is disappointing to note that ever since the introduction of FDI in defence in 2001, the grand total of investments in defence through the FDI route have been a meagre $15 million. As per the Budget Estimates (BE) for the year 2010-11, the defence sector has been allocated Rs 1,47,344 crore, an increase of 3.98 per cent over the BE of 2009-10. The expected defence spending over the next five years is $50bn.
Another case for strong legislation in favour of the proposed hike is also based on the fear that our vast dependence on imports can be stifled in times of crisis, leaving India defenceless. Considering that India needs to import even basic stuff, FDI can be kept out of areas which are really sensitive. In fact, the DIPP discussion paper had allayed concerns that India-based fully foreign-owned companies may not be in the county’s security interests, arguing that the concerns remained even in case of direct imports and hence could not be cited for opposing higher FDI.
Maroof, on the other hand, believes that there is no question of security being compromised. “Whether it is the 126 Medium Multi-Role Combat Aircraft or the Artillery Guns, we are procuring them from outside,” he says, adding, “Once the companies set up their base in India it will benefit the country.”
With India emerging as a major economic destination for several sectors, the efficient management of funds allocated in the defence budget will be of vital importance keeping in view its targets of reducing dependence on imports. What India needs today is a dedicated and technology specific policy which is flexible enough to attract frontier technology within the broad regulatory policy framework. It is vital that in the case of cutting edge technology, FDI limit be increased to 51 per cent to instil a sense of confidence in the foreign entrepreneur that he would continue to own the enterprise by holding majority stake.
An FDI cap of 49 per cent may prove totally unfruitful and could also pose as a major hurdle towards attracting high-end investments. Supporters of higher FDI say foreign investors will set up units in India that should lead to cheaper prices of defence equipment, secure supplies and steady jobs for Indians.
For India to sustain its steady economic growth and support it with a robust defence base, we need to offer opportunities which are more striking and attractive than other Foreign Direct Investors (FDI) competitors. In order to have a strong defence industry base in India, it is vital to recognise the peculiarities of the defence sector with investor facilities in line with prevailing international standards backed by proper policy support which override the dissuasive incongruities present in the sensitive sector of defence production.
For More IIPM Info, Visit below mentioned IIPM articles.
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