Extent of Foreign Direct Investment (FDI) that should be allowed in India’s defence sector has been a matter of intense debate in recent times. Guided purely by their own perceived interests, all involved parties have taken stands that are subjective in nature. Obsession to protect their own turf has blinkered their vision and rendered them incapable of carrying out macro analysis of the issue in an objective manner.

To achieve the often stated objective of procuring 70 per cent of defence requirements from indigenous sources by 2010, the government allowed 26 per cent FDI in the defence sector in May 2001. Detailed guidelines for the production of arms and ammunition were issued by the Department of Industrial Policy and Promotion (DIPP) of the ministry of commerce and industry, after consultations with the ministry of defence (MoD), in January 2002.

As per the current policy, the applicant company has to be either an Indian company or a partnership firm with management control in Indian hands. The chief executive has to be a resident Indian. A licensee can produce only the licensed products and in the sanctioned quantity — he can neither diversify nor enhance production. The policy directive further stipulates that arms and ammunition will be primarily sold to MoD and their sale to other security organisations in the country will be with the prior approval of the government. Similarly, their export will also need prior sanction. Non-lethal items may be sold to non-government agencies but with the concurrence of MoD.

There has been a total lack of enthusiasm on the part of foreign companies to invest in the Indian defence sector. As per the data released by the ministry of commerce and industry, total FDI inflows to India were a paltry seven million rupees during the period 2000 to 2009. As a result, there has been a strong demand from different segments of Indian and foreign industries to review the policy. Most prospective foreign investors consider the policy to be dissuasive in intent and content. They maintain that 26 per cent FDI limit can never attract foreign investments.

Bowing to pressure, a discussion paper has been circulated by DIPP in May 2010 to elicit views of all stake holders. The paper advocates raising of FDI cap to encourage ‘established players in the defence industry to set up manufacturing facilities and integration of systems in India’. It argues that raising of the limit to 49 per cent may not serve any purpose and proposes raising of FDI limit to 74 per cent for the following reasons:-

• It will provide incentive to foreign manufacturers to share their technological expertise, thereby promoting self-reliance in defence production.
• As more companies establish defence industries in India, significant reduction would accrue in the outflow of foreign exchange.
• India’s export potential would get a boost. Presently, they are stagnating at abysmally low levels.
• Manufacturing sector would get immediate impetus through development of large scale ancillarisation. India can become a hub for defence manufacturing activities.
• As defence industry is highly capital intensive, FDI would result in increased infusion of foreign investment, thereby reducing requirement of Indian funds.
• It would also encourage OEMs to bring in proprietary technology and lead to corresponding modernisation of our defence equipment and help promote private R&D by complementing the efforts of the public sector.

Stake Holders

As expected, response of all stake holders to the above discussion paper has been skewed and lop-sided. It is unfortunate that most are unable to appreciate criticality of the issue in terms of national security imperatives. In such an environment of self-interest promotion, national interests become the first casualty as decisions are invariably taken on the basis of partisan considerations.