FDI in Defence: Step Towards Self Reliance Or Retrograde
Defence is considered as one of the most strategic industry for any country as it is responsible for maintaining its security. It is because of this reason several experts oppose foreign direct investment (FDI) in defence on the grounds that it will put the security of country in the hands of a foreign company and its host country. Moreover, allowing foreign companies to set up manufacturing or assembly facilities in India would be a retrograde step as it will stymie the growth of indigenous capability, instead of making India self-reliant, it will be fully dependent on foreign companies.
As a humble beginning in May 2001, the defence industry was thrown open to the private sector. Then National Democratic Alliance government decided to open the sector with 26 per cent FDI after the Kargil war.
During the war, ammunition and spare parts were in short supply due to international restrictions on selling arms while hostilities are on. Since then, Larsen & Toubro, Mahindra and Reliance have entered the sector. Except for Pipavav Defence, which builds ships for the navy and coast guard, and Larsen & Toubro which builds critical components for missile systems, no private Indian company has made significant progress in the defence business.
Despite the opening of defence, virtually no FDI proposal was received by India till 2004. Between 2004 -14, FDI received by India in defence manufacturing amounted to the meagre of USD 4.94 billion out of the USD 322 billion FDI inflow. This tilted the debate of FDI in defence in the favour of opponents of FDI and it was demanded to keep importing crucial defence equipments till indigenous industry acquired the capability of producing them by replication which is often called as reverse engineering.
By virtue of reverse engineering, Indian scientists have been able to produce some high end products but it took such a long time that their products become obsolete by the time they are developed and delivered.
Light Combat Aircraft (LCA) project, renamed as Tejas was started in 1983 and it is yet to be inducted in Indian Air Force (IAF). In 1990, it was believed that defence imports would be reduced from 70 per cent to 30 per cent within a period of ten years as the domestic industry will develop. However, after two decades, imports rose to 75 per cent.
On the other hand, the proponents of FDI believe that opening up of defence for foreign investment will help in making India self reliant in production of defence equipments. There are nine defence public sector undertakings and 39 Ordnance Factories under the Ministry of Defence. But despite getting preferential treatment by their ministry, they all have failed to keep pace with technological developments and have developed no indigenous competence at all.
Currently, India is procuring almost all critical weapon systems that are produced or integrated abroad. It is beyond logic that the security of the country would get threatened if the same weapon systems are produced or integrated in India.
As a matter of fact, indigenous production will also insulate India from unilateral imposition of embargos on contracted supplies by foreign governments. Supply assurance from indigenous facilities will always be significantly more than dependence on imports. Additionally, indigenous manufacturing facilities will also ensure better life-time support including supply of spares.
Though opening of defence for foreign investment will not guarantee a self reliance, but past experiences suggest that keeping the doors for foreign investment close will definitely keep India dependent on imports. So, as an important development in Budget 2014-15, Union Finance Minister Arun Jaitely increased the FDI limit to 49 percent. India is the largest buyer of defence equipment in the world and its domestic manufacturing capacities are still at a nascent stage.
The country meets a substantial part of its defence requirements by buying directly from foreign players. As the purchase of technologies under ‘Buy and Make’ route from these players had failed to ensure infusion of meaningful technologies, asking these players to produce in India will be a cautious step towards self reliance.