Hope at last for Indian Defence

India Today

June 30, 2014

The foundation of less government and more governance rests on maximum security. And here, the new Government has got off to a flying start by proposing 100 per cent FDI in defence. This underscores a break from the past.

One does not have to be a Carl von Clausewitz or Hans Morgenthau to comprehend that the prestige, influence and ultimately the welfare of a nation rests on the twin pillars of economic strength and military might. Unfortunately, the importance of the latter was lost on India even when it made a radical shift in its economic policy in 1991. And we are today hostage to the policies of exporting nations for around 70 per cent of our capital acquisition.

The idea of 100 per cent FDI in defence is itself not new. Since 2008, many in the Indian strategic community have pitched for higher FDI in defence. But the policymakers were focused on ring-fencing the Indian industry, as if foreign defence companies were waiting in the wings to steal military technology from India and subvert its strategic capability. The fact that we could only attract around $0.35 million per year since 2000 until March 2014 as FDI in defence or only around $0.16 million per year more than we attracted as FDI for coir industry, is a startling testimony to how off the mark we were.

We also miserably failed to grasp that the development of defence industry is an evolutionary process with a long gestation period. It has to go hand-in-hand with industrial development with the defence sector being accorded equal importance. On the contrary, as we liberalised our economy, the doors were shut on the private industry, hence preserving the defence sector primarily for the mostly inefficient public enterprises.

The new policy, when implemented, could be a game-changer. It could bring in enormous economic benefits too. For instance, the Kelkar Committee had concluded that higher defence production could drive growth in the manufacturing sector by 8-14 per cent. But for the policy to yield optimum results, it would be necessary to implement it in conjunction with attendant measures with the singular focus on the development of a robust indigenous military industry. And this will not be easy.

There are several measures that we would need to take while we permit 100 per cent FDI in defence for it to yield results. First, we should create an ecosystem to attract companies to set up production facilities in India. They should be reasonably confident of making attractive returns through a policy that would automatically make it productive for both.

Second, this is not the time for incremental approach. Allow up to 49 per cent FDI in defence through the automatic route. Portfolio investments may be restricted as a matter of strategy to limit the foreign holdings of the entity to this ceiling to ensure greater participation by Indian companies in the enterprise being set up.

Third, permit FDI above 49 per cent for investments to fill critical gaps in indigenous defence systems. Allow 75 per cent FDI and above when a company seeks to manufacture high-end items, involving sophisticated technology, in the country. Ownership of 75 per cent and above of an entity would give the management all the powers necessary to chart its own policies.

Fourth, give incentives like tax holidays to companies depending on the level of technology that they would induct. To sustain their interest, there should be provision for repeat orders on the condition that the wares are upgraded periodically. Establishing special defence zones on the lines of SEZs would also help. Tax concessions for export of their products to encourage parent companies to source from their subsidiaries in India could be an added incentive.

Fifth, since Department of Industrial Policy and Promotion would not normally have adequate expertise on defence issues, there should be a body for advising the department on technology and the conditions required for imposing different levels of FDI. This body should have experts drawn from the three services, representatives of identified domestic industry associations and from DRDO.

Sixth, simplify the Defence Procurement Procedure (DPP). Make it compulsory for all acquisitions to be made on competitive basis through an Indian company providing a pre-announced purchase preference for the company which exceeds the minimum prescribed level for indigenisation. Seventh, pursue synergy between FDI investments and offset policy. Allow even 100 per cent FDI to foreign companies to discharge offset obligations, permitting the use of multipliers (according higher value) for the production of critical defence wares. Last, where private companies are unable to raise resources, empower and financially assist existing PSUs to invest in such ventures.

Achieving self-reliance in defence would take decades. The new Government has made a determined and eloquent start.