Though the new Defence Ministry under the Narendra Modi-led NDA Government will take time to decide on raising the foreign direct investment (FDI) limits in Indian defence sector, industry circles are gradually mentally adjusting to the new policy regime of liberalised FDI in defence. They now seem to be enthused over the prospects of foreign arms majors setting up their independent facilities in India for fulfilling the long-term contractual obligations of the Indian armed forces. In May 2010, when the Department of Industrial Policy and Promotion (DIPP) had first come out with the proposal for raising the FDI cap, the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) had expressed apprehensions over the move, and now they have welcomed the proposal by the Commerce Ministry.

President of CII Ajay Shriram welcomed and fully endorsed the latest move to raise the limit on FDI in defence. The other industry chamber FICCI, welcoming the move, said that FICCI sees this proposal in the light of increasing the share of manufacturing in the GDP to 25 per cent as enshrined in the national manufacturing policy. Nikhil Gandhi, Chairman of Pipavav Defence, reacted positively to the move saying that “unless there is 100 per cent FDI in defence, foreign companies will not bring in technology. There should be equal opportunity for them to earn money from India.”

When the new Defence Minister Arun Jaitley reacted positively to the fresh DIPP proposal, which is in accordance with Narendra Modi’s vision to revitalise the manufacturing sector in the country, the chambers had maintained silence. Perhaps the industry chambers fear losing ground to the multinational defence companies, but they deliberately forget their lack of technical expertise in manufacturing the state-of-the-art systems on their own or even in a joint venture mode with foreign companies. Even the previous government allowed 49 per cent equity participation, but no multinational company came forward to set up their facilities in India. Since the Indian armed forces are expected to acquire arms and ammunitions worth over $100 billion in the next one decade, the country will have to devise policy framework to encourage the international companies to manufacture their systems in India itself either with 49 or 74 or 100 per cent equity participation.

In spite of India developing a vast network and huge infrastructure of defence manufacturing facilities over the last six decades in almost every area of weapon systems, the country still remains a major importer of arms and ammunitions. Since they all belong to the public sector, their bureaucratic style and culture of working perhaps were responsible for India continuing to import over $8 billion worth of arms since 2007 every year and the country has emerged as the top ten arms importer. This trend will continue and India will remain dependent on imports if the policy makers of the country remain mired in cold war mindset of security leaks and threats. Though in recent years the government has encouraged private sector to enter into defence sector in a big way but the ecosystem needed for a flourishing defence industry was never created. The Ministry of Defence has also in recent years adopted Defence Procurement Policy with special emphasis on offset rules which compels the foreign arms majors to source at least 30 to 50 per cent of the total deal from India, if it is over $300 million. However, since Indian private sector in defence is still in its infancy, they have not yet developed enough expertise to take advantage of compulsorily meeting the requirement of offset provisions. The foreign supplier also finds it difficult to find a suitable local partner who can help source at least 30 per cent of the deal from India.

In this backdrop it has become more than necessary to create an enabling policy regime which can attract the international arms majors to set up their shops in India itself, which would not only bring their high technology and management practices but also locally make available their high technology products, which otherwise may be subject to sanctions in case bilateral relations go sour. The DIPP has said in its 15-page note to the Defence Ministry that the proposed 49 per cent limit in FDI should be allowed in case of no technology transfer and 74 per cent if the international company agrees to transferring its technology to the Indian partner. The DIPP has also proposed the 100 per cent or no-cap proposal for those defence systems who will offer to bring their state-of-the-art technology. According to Ajay Shriram, “CII is very keen to see very high-tech and highly complex systems integration work being done in India and Indian industry is ready to take this challenge and opportunities. Opening up various sectors have helped Indian industry grow and become globally competitive.”

Experts believe that if the foreign arms majors come to India with their latest technology it will result in India becoming a major hub of arms production and will also help India emerge as major outsourcing centre for defence-related spare parts, which will provide a very long-term business to the India-based facilities. They can also export their weapon systems from the facilities they may establish in India. On the other hand, the Indian defence facilities were never able to export defence systems worth annually more than Rs. 250 crore. The eight defence public sector undertakings and over 40 ordnance factories are assisted by over 40 defence research laboratories, but they are only able to fulfil about 30 per cent of India’s defence imports. These defence facilities have set up a huge infrastructure and have over the years generated a very good trained human resources. If the DIPP proposal is put into practice, these strengths of Indian defence sector can be utilised by either Indian defence companies or by any foreign partner who can either set up a joint venture or work in technology transfer agreement to produce systems in India under an agreement. This will enable Indian armed forces to acquire latest defence systems made in India and which will also reduce the dependency on imports.

Whenever there is a move or proposal from an official agency or private sector to increase the FDI limit to 74 or even 100 per cent, concerns have been expressed relating to security and an ignorant Defence Ministry leadership develop cold feet and the proposals are kept in abeyance. But in today’s transparent world nothing remains secret. During the Cold War days the defence companies of one block could have exported their products only to their partner countries. But today two rival nations like India and Pakistan get their supplies from the same country and even same company. So the talk of security concerns have become irrelevant and the government must think of developing self-dependency in weapon systems by providing an enabling environment and congenial ecosystem to foreign partners to be able to establish defence facilities in India.