It is only through the development of a strong indigenous manufacturing capability, induction of cutting-edge technologies and backing of a powerful domestic economy that the nation can hope to be a credible military power and then aspire to be the superpower. The nation cannot hope to achieve these lofty ideals and objectives on borrowed feathers.

The debate on lifting the cap of 26 per cent on foreign direct investment (FDI) in the Indian defence industry appears to have ended, at least for the time being. As per the latest pronouncements by the government, FDI cap in the defence sector will remain at 26 per cent and proposals beyond that will be considered by the Cabinet Committee on Security on case to case basis.

Today, India is perhaps the world’s largest purchaser of defence hardware, 70 per cent of which is procured from foreign sources leading to heavy outflow of foreign exchange. Since independence, the Indian armed forces have had no option but to depend on foreign suppliers as the indigenous defence industry in the public sector which despite the massive investments by the government, has just not been able to deliver even after six decades of existence.

The defence sector is undoubtedly capital-intensive and is vulnerable to rapid technological obsolescence. Hence this sector not only requires heavy investment, but easy access to the latest technologies. With a view to strengthen and bring about a qualitative change in the indigenous defence industry, some years ago, the government approved FDI into this segment of the economy. At the outset, the limit of FDI in the Indian defence sector was pegged at 26 per cent under the belief that this would serve as a catalyst for its growth. However, contrary to expectations, foreign investors have apparently not found this level of FDI lucrative enough. This is evident from the fact that over the last 10 years, FDI in the Indian defence manufacturing sector has been a paltry $4 million ( Rs. 24 crore). At the limit of FDI pegged at 26 per cent, leading global aerospace majors and original equipment manufacturers (OEMs) have not been inclined to transfer highend, advanced or futuristic proprietary technologies to the Indian defence industry as the former have neither control over the joint venture company in India nor any say in how the technology is utilised or exploited. The net result is that the indigenous defence industry has continued to languish and stagnate at a low level, both in respect of technology and manufacturing capability. The nation’s aspirations to transform the Indian defence industry to achieve a respectable level of self-reliance, has remained a distant dream.

But of late there has thankfully been some forward movement in this area. Driven by concerns over rising current account deficit which is nudging five per cent, the Ministry of Finance constituted a Parliamentary Consultative Committee to explore the possibility of speedy infusion of funds into the Indian economy through spurring foreign investment. As a first step, the Parliamentary Consultative Committee proposed raising the cap on FDI across a number of sectors of the Indian economy including the Indian defence industry for which it recommended enhancement of FDI from the existing 26 to 49 per cent. The Ministry of Defence, however, has been opposed to the proposal on account of the apprehension that enhancement of the limit of FDI to 49 per cent could lead to the possibility of the nation’s strategic interests being compromised even if the foreign investor did not have total control over the Indian company. Assurance by the Ministry of Finance that “the government could retain the right to impose internal security conditions including surveillance systems or controlling production and deployment of defence personnel”, did not mitigate the apprehensions of the Ministry of Defence.

The new provisions related to FDI in the Indian defence industry appears to have been formulated to reconcile the differing perceptions and to subdue the conflict between the different ministries of the government. However, for the foreign investor, there appears to be no substantial change in the situation as limit of FDI in the defence sector through the automatic route, remains unaltered at 26 per cent. The proviso regarding proposals beyond 26 per cent to be considered by the Cabinet Committee on Security on case to case basis limited to high technology only is hardly inspiring. Given the tardy and convoluted decision-making process of the government, foreign investors are unlikely to be enthused by the latest changes in the regulations governing FDI in the Indian defence industry beyond 26 per cent.

In the final analysis, it must be understood that unbridled enhancement of FDI in the defence sector to 49 per cent will be the key to enabling the private sector to grow quickly and play a much more vibrant and significant role in the Indian defence industry. It is only through the development of a strong indigenous manufacturing capability, induction of the cutting-edge technologies and backing of a powerful domestic economy that the nation can hope to be a credible military power and then aspire to be the superpower. The nation cannot hope to achieve these lofty ideals and objectives on borrowed feathers.