India’s notorious dependence on imported military hardware and the near moribund state of large parts of its public sector industry represent a full-blown crisis crying for a solution. India is the world’s largest arms importer and, with at least two decades of not replacing or upgrading obsolescent equipment through either purchases or indigenous manufacture, is on course now to spend around $30 billion in the next few years, and $200 billion in the medium term. For some years now, from the Atal Bihari Vajpayee-led National Democratic Alliance government in 2001 onwards, the government has been veering towards increased foreign direct investment (FDI) in defense manufacturing as a solution to the defense crisis.
The present Bharatiya Janata Party government, despite its rallying ‘Make in India’ cry, has further increased the FDI limit in defense, with 49 per cent now permitted under the automatic route, 75 per cent where technology transfer is involved, and up to 100 per cent in cases involving significant new technology. While some Indian companies are wary of the entry of foreign players, most favor opening up the sector with an eye to the potentially lucrative business opportunities they see opening up.
For and against FDI
The arguments in favor of FDI in defense are familiar. First, public sector companies in defense, Research and Development and allied industries have consistently failed to meet the requirements of the armed forces, especially given the global revolution in military technology. Second, the superior management culture of the private sector will ensure better adherence to budgets and timelines. Third, the country is compelled into repeated imports without any technology transfer (despite contractual obligations) because the military is always urgently in need of the technology. Therefore, the argument goes, encouraging foreign companies to invest in Indian defense and set up industries here will mean that money will be spent within the country, generating jobs and bringing in new know-how, with the possibility of exports.
In my opinion, none of these arguments address the specific and unique needs of the defense sector in India. Whatever else these measures might achieve, they will not help accomplish what must surely be the main goal, namely to build self-reliance in advanced military technology and reduce India’s debilitating dependence on foreign suppliers in the area of national security.
The FDI inflow itself tells a tale. All the liberalized provisions since 2001 have led to a meager inflow of only $4.8 billion, in an overall FDI inflow of around $334 billion. It may be argued that it is too early to judge, but there are actually good reasons why defense companies do not and will not find FDI in another country attractive, and why there are few such examples across the world.
FDI means a long-term presence in India, and good returns on investment are possible only if repeat orders or contracts for newer models are assured. But, unlike cars or white goods, that will not always happen in military equipment. There may be gaps of many years or even decades between orders. For instance, India bought the Mirage 2000 in the 1980s and has clinched the Rafale deal this year, both from Dassault of France. In France itself, however, Dassault is reasonably assured of continuous business from regular domestic and European orders, as well as from staggered exports. Foreign subsidiaries or substantial FDI will, thus, always put pressure on India for repeat orders. Would dependence on a Lockheed Martin (India) or a Bharat Boeing be really very different from dependence on the U.S. principals?
Yes, more of India’s money will be spent in India rather than in other countries. But the Defense Procurement Policy anyway mandates 30 per cent offsets (50 per cent in high-value contracts). In other words, the supplier must spend 30 per cent of the contracted value within India through local manufacture and services. On the other hand, even if manufacture were by an Indian subsidiary, some specialized technology or components will always need to be imported. As is the case in car manufacture by Korean or Japanese subsidiaries in India, where numerous models that sell in smaller volumes are only assembled in India with imported components. FDI may, therefore, not be so different from offsets in terms of local manufacture, jobs, or money spent.
Where is the technology?
It is often simplistically assumed, unfortunately by policymakers too, that FDI will bring in technology. Nothing could be farther from the truth. All foreign defense majors have protested continually against offsets, and have pressured India into diluting offset requirements one way or another. While they might cite logistical or other issues, the real anxiety is about sharing and losing control over technology, especially if the offset partner in India is a public company whose bargaining power would be greater than that of a private sector junior partner. The delay over finalizing the Rafale deal was reportedly over disputes about the role of Hindustan Aeronautics Ltd.