Increase FDI limit in defence
Apr 12 2010
New offset regulations have been stipulated by the government to boost indigenisation of the defence industry, build India’s defence industrial base and transform the sector through increased modernisation, transparency and reliability. These market developments have created attractive business opportunities for a range of global and Indian firms. The question is – “Is this enough?” Do we need to re-look at the situation and see if the budgetary allocations and policies are in line with the new India that we want to build? Or do we continue to have the armed forces with weapon inventory that is inadequate and outdated?
Enhanced defence budget needs to be complemented with robust policies to provide thrust to a variety of business projects that are mutually beneficial to the stakeholders, which in this case are Indian government, foreign OEMs and private/public industry. Unspent budget, cancelled contracts and prolonged procurement process will continue to drag down the sector.
The Centre has moved in the right direction by introducing the offset policy. Now, we also have in place a much-needed procurement process. These policies display the government’s keenness to reduce over-dependence on foreign suppliers that is at 70 per cent of the total procurement plan. On many occasions, we have heard the defence minister expressing a desire to create an environment to encourage technology transfer. There is a strong realisation that this can be brought in by foreign manufacturers collaborating with Indian industry. Indian players need to play a more active role in building this industry.
Recently, the commerce ministry, in a note to the cabinet secretariat, suggested that global defence firms be permitted to set up manufacturing units in India with 100 per cent FDI. The move, the ministry feels, would reduce the role of illegal arms agents. The note also states that for future RFPs, the country could impose a condition that the successful bidder set up system integration in India. The successful bidder should also be allowed to bring equity through FDI. Unfortunately, this view is not supported by the ministry of defence. The argument against increasing the FDI limit beyond 26 per cent is based on fears of loss of ownership and operational control over its exports. A case in point to counter this argument would be that of BAE System Inc, the subsidiary of BAE System Plc, UK, which is under full regulatory control of the US government and employs 47,000 from the US. Under a Special Security Agreement between the US government, BAE System Inc and BAE System Plc, the company has mitigated its foreign ownership and set up procedures to comply with the US national security requirement. Special provisions like Government Security Committee have been set up. This body oversees the company’s compliance with the US government and export regulation.
We need to seriously look at enhancing the FDI limit in India’s defence sector to ensure that it attracts foreign collaborators to set up manufacturing base in India and encourage them to part with their cutting-edge technology. In the absence of such forward-looking policy measures, India will become a dumping ground for old technology and will inevitably end up paying high price as replacement and maintenance costs. The glo
bal aerospace and defence companies are facing huge recessionary trends and are looking for setting up alternate bases for manufacturing in India. India has already made its mark in the automotive component sector with a large number of global auto giants sourcing from India. Domestic heavy/light engineering and IT sectors have come a long way with high-end innovations and design capabilities. There is no reason why Indian companies cannot stand up to the requirements of the aerospace and defence sector. However, these firms will need to become competitive to prompt global prime contractors to maintain long-term supplier relationships.
While the enormous potential in this sector has infused enthusiasm among global and Indian firms, there still exists a reluctance to take the next big step. The world is looking at India as the next big opportunity but the FDI policy, complex tax regime and difficult SQR formulation are perceived as major deterrents.
May be, it is time for us to re-look at the incentive structure to provide the right environment for creating a new history. Formulation of national industrialisation policy, extension of validity of offset banking, increased FDI, introduction of use of multipliers, well-defined SQRs (service qualitative requirement) are some measures that can enhance industry’s chances to absorb the benefit of offsets. These measures could motivate new domestic and foreign entrants and provide the much-needed fillip to this core sector.