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#dnaEdit: The Modi administration’s moves to raise the FDI cap in the defence sector are long overdue

Saturday, 31 May 2014 - 6:05am IST Updated: Friday, 30 May 2014 - 8:07pm IST | Agency: dna

If the definition of insanity is repeating the same mistakes and expecting different results, the country’s defence production policy has long been crafted in padded cells. It seems the Modi administration is set to change this. Its internal consultations regarding raising the cap for foreign direct investment (FDI) in defence shouldn’t come as a surprise — the BJP manifesto had touched upon this explicitly, referring to FDI in “selected defence industries”, as well as by inference in the context of allowing FDI in various sectors for job and asset creation — but it is heartening that it has taken the matter up so swiftly. Pushback from defence ministry bureaucracy is a given. But Modi and Arun Jaitley, currently holding the ministry as an additional charge, must show the political will — conspicuous by its absence in previous administrations — to push ahead with it.

The past quarter-century is testament to how the lack of this will has degraded India’s defence capabilities. As far back as 1991, the Arun Singh Committee on Defence Expenditure had pointed out the obsolescence of the country’s ordnance factories, recommended shutting down five of them and opening up various areas to the private sector. Nothing of the sort happened. A few years later, an APJ Kalam-headed committee targeted increasing the indigenous content of weaponry from 30 to 70 per cent by 2005. Nearly a decade past the deadline, the ratio remains unchanged. And while the government did open up the defence industry to the private sector in 2001, capping FDI at 26 per cent has meant that next to nothing has come in from foreign investors; consequently, the public sector continues to do the heavy lifting, and badly. The sum total of all this is a dependence on the import model that has created an enabling environment for corruption — from the Bofors case to the Barak, Tatra and AugustaWesteland scandals — and crippled the armed forces’ modernisation programmes.

Without substantial FDI and the access to high-end technology it would bring with it, the Indian private sector is at a substantial disadvantage. The lack of control the current FDI cap would give foreign investors, coupled with policies that maximise risk and minimise the potential of appreciable returns — a three-year lock-in period for the investor, requiring government sanction for diversifying production, no purchase guarantee by the government — mean that buying in is simply not worth the stake.

The twin arguments that raising the FDI cap will compromise national security and prevent the development of the indigenous industry is rooted more in a muddle-headed sort of nationalism than logic. A higher stake makes it far more likely that foreign investors will follow standard global practice and establish production facilities within India. That, in turn, undercuts the main argument against FDI — that in times of crisis, foreign investors can cripple the Indian armed forces by shutting down their factories. If anything, continuing to depend on an international supply chain renders the armed forces substantially more vulnerable. Likewise, indigenous companies, particularly the public sector giants, have had decades to prove themselves. The protracted development timelines and various setbacks of the Tejas LCA and Arjun MBT projects — to name just two — show how comprehensively they have failed to deliver. If the domestic private sector is now to provide a viable alternative, joint ventures with foreign majors that provide the required resources and expertise are the only realistic way to go about it.

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