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In the Right Direction

The new defence FDI policy is in sync with ‘Make in India’

Maj. Gen. Mrinal Suman (retd) Maj. Gen. Mrinal Suman (retd)

It is an old saying that every failure should be viewed as an opportunity to introspect and learn. The above is true for national policies as well. As all of them cannot be successful, persistence with the failed ones becomes counter-productive. They must be discarded and replaced. For that, it is a prerequisite that national leadership is honest enough to accept the failure of the existing dispensation. Thereafter, radical reforms should be undertaken. As has been seen in the past, half-hearted approach with compromises to accommodate different interest groups serves no purpose at all.

It is to the credit of the present government that it has accepted the failure of the current policy on Foreign Direct Investment (FDI) in defence. Despite periodic changes in the guidelines, foreign investors have shown a distinct disinclination to invest in India. Displaying rare boldness, the government has thrown open the sector to foreign investors, allowing even fully owned enterprises. The policy-decision of 20 June 2016 has the potential to kick-start indigenous defence production. In addition to enhancing self-reliance in the production of defence equipment, it will give a big boost to mission ‘Make in India’.

A Chronicle of Vacillation and Skewed Opposition
It was in May 2001 that the defence industry was first thrown open to the private sector. The government permitted 100 per cent equity with a maximum of 26 per cent FDI component, both subject to licensing. The industry was euphoric but the issuance of the detailed guidelines in January 2002 dampened its spirits, especially with regard to the FDI norms. They were considered highly dissuasive, both in intent and content.

It was mandated that the chief executive of the joint venture should be a resident Indian; management control must remain in Indian hands with majority representation in the board; there would be a lock-in period of three years before a foreign investor could transfer his equity; a licensee could produce only the licensed products and in the sanctioned quantity; arms and ammunition would be primarily sold to the ministry of defence (MoD); no exports would be allowed without the prior approval of the government; and the government would retain powers to inspect the finished product and conduct audit of quality assurance procedures.

In addition, the government declared that it could give no purchase guarantee to the joint venture but the proposed quantity for acquisition and overall requirements could be made known to the extent possible. Thus, with no assurance of orders from the Indian government and restrictions on sale to other customers/countries, no foreign investor found Indian policy to be attractive enough. Such a lop-sided policy was doomed to fail and it did. As per the data released by the ministry of commerce and industry, total FDI inflows to India in the defence sector were a paltry Rs 7 million during the period 2000 to 2009.

As a result, there was a strong demand from different segments of Indian and foreign industries to review the policy. Most prospective foreign investors found 26 per cent FDI limit to be most unattractive. Consequently, a discussion paper was initiated by the department of industrial policy and promotion (ministry of commerce and industry) in May 2010, proposing raising of FDI limit in the defence sector to 74 per cent. It sought views of all involved parties. It argued that such a move would provide incentive to foreign manufacturers to invest funds in India and share their technological expertise, thereby promoting self-reliance in defence production and advancing private R&D to complement the public sector.

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