Higher FDI for stronger defence

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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India will not be a superpower but it won't collapse either

INDIA'S BEST COLLEGES, INSTITUTES and UNIVERSITIES

Bangalore-based historian and writer Ramachandra Guha spoke to TSI's Satish Chapparike about the many challenges that India faces. Excerpts from the interview...

Do you really think Indians lack a sense of history?

One cannot and should not make generalisations about a whole nationality: Indians are like this, foreigners are like that. But we certainly need much more historical sense. History is part of modern society. Young Indians are curious about history. May be in the past they were not. But now they are. They want to know how this country was made, the major leaders and the controversies involving the figures who created India. It is a mistake to think that we are not interested in history. If we are not interested in history, why would a 900-page book like India after Gandhi be translated in Kannada? Also in the pipeline are translations of the book in Malayalam, Tamil and other languages. I think there is a growing interest in history in India.

What about the political abuse of history in India?

That is indeed a problem. History is susceptible to abuse or misuse by political parties. Scholars must be careful in this regard. As far as Indian scholars are concerned, I think they are doing a honest and serious job. But the political parties jump in. They either want to present a one-sided interpretation or if someone comes up with book which doesn't suit them, they ban it. That is a very unhealthy atmosphere. For example, Shiv Sena threatened the author of Shivaji (James W Lane) and the Congress threatened the Spanish author who wrote a book on Sonia Gandhi (Javier Moro). But on the whole, Indians are getting increasingly curious about history. They want to understand history in greater complexity and diversity.

Do you think we got Independence at the right moment?

The important thing is that we got it. Yes, things could have been different, but we were prepared for Independence. Of course, some mistakes were made. The loss of life during Partition was extremely tragic. Perhaps the political class should have been wiser, not all, some of them. For example, the Viceroy was advised to deploy more army detachments in Punjab region; he failed to do that. So there was more violence in Punjab. Gandhiji appealed to Jinnah for peace but he refused to sign the peace deal. Some mistakes were made, but I don't think we were not prepared for Independence.

Your take on socio-economic development of India in the last six decades'

I talked about it in my book. I wrote that in India 50 per cent democracy exists. That means we have achieved 50 per cent success. We have a free press, we hold regular elections and we have stayed united as a country. Now we are a growing economy too. On the other side, there are growing inequalities, decline of the political system, environmental degradation and a great urban-rural divide. As an experiment in nation-building, India is only a modest success. The important thing in history is to recognise the gray shades, and not just the black and white. The truth is India is full of contradiction. Some parts are doing well. Others are doing terribly. Democracy in India is robust. For example, we hold this complex election in which 400-500 million people vote. It is a phenomenal exercise. We do it better than most western countries. That is very impressive. But political and other institutions are decaying.

Do you want India to become a superpower?

Not me. Some people have a kind of inferiority complex. That stems from comparison with the West. Some of us think that to overcome it we must become as strong as the US or China. Some sections of the political, media and business elite in New Delhi and the young middle class in general want India to take on the world and become a superpower. But my thinking is different. I want India to be more at peace with itself.

What about the China-India race?

The good thing is that we have put the border war behind us. In the 1950s and 1960s, after that defeat in the war, we had a huge complex about China. We said they are unreliable and that they had betrayed us. Slowly we are evolving a healthy relationship with China. But there are a few unhealthy aspects in this relationship. For one, we have not put enough conditions for the export of raw material from India to China. Not just iron ore from Karnataka, but also bauxite from Orissa and central India. Unregulated mining has wreaked havoc. Forget the corruption; think about environmental and social problems, and all these for feeding the hunger of the Chinese economy. The Chinese are destroying our environment and protecting theirs. In this respect we are very short-sighted. These are the kinds of things we have to be very careful about, not the military side. We are not going to have a war with China.

What do you make of India's disturbed neighbourhood?

The developments in Pakistan and Afghanistan will have a long-term effect on us. We live in a very unstable neighbourhood. Nepal is also highly unstable: are the Maoists there really interested in the democratic process or do they want to go back to the jungle? We don't know. Sri Lanka is just coming out of civil war. Pakistan is on the brink. We have to be very alert.

The threat of red terror is worsening by the day'

I don't like the phrase 'red terror'. These are all catchy media phrases. Again, this is a serious, complex problem and its roots lie in deprivation of the tribal population whom the government has ignored for decades. But at the same time I don't approve of the violence at all. The Maoists of India would be well advised to enter the democratic process. They have to abandon armed struggle and fight elections. If they want to change the policies, they must do so through elections and by entering the government. At the moment violence is taking a heavy toll.

Keeping these things in mind, isn't it still relevant to ask: will India survive?

I posed that question in my book because everyone thought that India will break or it will come under military rule or there will be a civil war. I have to ask, why does India survive? Why this contradiction and puzzle called India, how did it survive? I think India will stumble along. We are not going to become a superpower but neither are we ever going to collapse.

What are the future projects that you are working on?

I have just edited an anthology of 150 years of Indian political writing by personalities ranging from Raja Rammohan Roy to Jayaprakash Narayan. The most interesting thinkers of India writing about gender, caste, nationalism, language, economic policy will be in this book. Some of them are, of course well-known people like Gandhi and Nehru, while there are also lesser known thinkers like Tarabai Shinde and Kamaladevi Chattopadhyay. The book will be out in October. I am also working on a new biography of Mahatma Gandhi. It will take six to seven years to complete.
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