By Lt. General P.C. Katoch (Retd) Former Director General of Information Systems, Indian Army

The Narendra Modi Government has announced that foreign direct investment (FDI) in the defence sector is permitted to 100 per cent level. Till now, the FDI regime permitted 49 per cent FDI participation in the equity of a company under automatic route. Foreign investment beyond 49 per cent has now been permitted through government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. The condition of access to state-of-the-art technology in the country has been done away with.

FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under the Arms Act of 1959. It may be recalled that when the FDI in defence was hiked from 26 per cent to 49 per cent when presenting the defence budget for FY 2014-15, that time too the Parliament had approved consideration of FDI in defence beyond 49 per cent on case to case basis where state-of-the-art equipment was involved. However, last year news trickled in that all the cases of FDI in defence were stuck with the Foreign Investment Promotion Board (FIPB) because the Ministry of Defence (MoD) had still not defined what was meant by ‘state-of-the-art’. While hiking the FDI from 26 per cent to 49 per cent in 2014, the government perhaps did not have enough time to examine why with 26 per cent cap for FDI in defence had fetched less than $5 million FDI in last 14 years – a mere 4.94 per cent. Had this been done, it would have been deduced that 49 per cent FDI cap is not going to be enough.

The fact is that we have a glut in technology and critical voids, which need imports. Even the Tejas fighter though termed indigenous after years of development has some 80 per cent components and assemblies that are imported. To obtain high-end technology while foreign firms are eager and we can leverage our strategic and defence partnerships to facilitate the JVs, this certainly warranted FDI far greater than 49 per cent.

It is to the credit of the Modi Government that a bold decision has been taken to increase the FDI in defence sector to 100 per cent. This will certainly give the required fillip to ‘Make in India’ as well as boost defence exports.

It may be recalled that immediately post the announcement of hike of FDI in defence from 26 per cent to 49 per cent in 2014, Ulrich Grillo, President, Federation of German Industries, visiting India told reporters that German Industries would not like to invest in India since with 49 per cent FDI they would not have control over selling the products. In March this year, Airbus chief expressed similar sentiments, which is common to most foreign investors. In fact Airbus India chief specifically pointed out that Airbus Group is keen to replicate joint development and manufacturing model as in other countries but “49 per cent holding curb wouldn’t encourage the big companies to come to India”.

The media reports that FDI inflows into the country increased to $55.46 billion in 2015-16 as against $36.04 billion during 2013-14, which is the highest in any financial year. But the point to note is that FDI in defence the aggressive push for ‘Make in India’ failed to attract foreign investors, totalling to just Rs. 56 lakh in 2014-15 as brought out by the Minister of State for Defence. Significantly, for past several years, the Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry had been recommending 74 per cent FDI in case of transfer of technology (ToT) in cutting-edge and 100 per cent FDI in case of state-of-the-art (read high-end) technology. Obviously, such recommendations were being made after thorough study and analysis.

It is to the credit of the Modi Government that a bold decision has been taken to increase the FDI in defence sector to 100 per cent. This will certainly give the required fillip to ‘Make in India’ as well as boost defence exports. What needs to be ensured is that while the DPP 2016 is implemented in true letter and spirit, cases of FDI in defence ‘through the government’ route are also processed speedily – cutting out the red tape in both cases. 100 per cent FDI in defence will be a big boost for ‘Make in India’ in defence. The push for state-of-the-art defence equipment indigenisation is vital with current period.

The Indian military’s current equipment holdings are 50 per cent obsolete and multiple critical voids exist because of sustained neglect over the past decade plus. The proportion of state-of-the-art equipment also needs to grow from its current level of 15 per cent to at least 30 per cent with the current cycle including acquisitions drafted under the Long-Term Integrated Perspective Plan (LTIPP), which is expected to include procurements worth $100 billion by 2022. A holistic approach to equipping the military is the need of the hour.

“The defence FDI policy amendment introduced by the government is very pragmatic because state-of-the-art technology was not defined in the previous policy and the way it was, it conveyed a one-dimensional perspective on why a foreign OEM could require more equity stake. The new policy wording communicates the realisation that there may be several other genuine reasons for the government to allow more than 49 per cent stake to the foreign OEM in a joint venture with an Indian company and they want to take advantage of these for the benefit of the indigenous industry.”

— Pierre de Bausset, President, Airbus Group India on the amendment