Higher FDI in defence sector to attract MNCs, give 'Make in India' a boost

The local companies will be at a disadvantage if they don't' get orders from the government

The increase in foreign direct investment (FDI) in defence sector to 74 per cent will encourage multinationals to set up manufacturing bases in India or acquire local companies but will hit hard the local companies who do not have any access to technology or government orders.

“Without giving an opportunity to the Indian private sector, the government has offered Indian contracts on a silver platter to foreign companies”, said the head of an Indian defence company on the condition of anonymity.

“The government had announced Make in India six years ago but since then no major defence contracts went to Indian companies, which is a sad commentary,” he said.

CEOs of local companies said that the government should have first given contracts to Indian companies and allowed them to source appropriate technology partners and also bring in FDI. "This would have served the national interest and very objective of the government. The government must make it mandatory for foreign companies to make in India," he suggested.

India gives orders worth $100 billion a year for defence procurement, making it one of the world’s lucrative markets for defence companies. Net FDI inflows grew 14.2 per cent in 2018-19. The top sectors attracting FDI equity inflows are services, automobiles and chemicals.

In May 2001, the defense sector, which was earlier reserved for the public sector, was opened up to 100 per cent for Indian private sector participation, with FDI up to 26 per cent, both subject to licensing. The FDI policy was further liberalised, allowing 49 per cent stake under automatic route and above 49 per cent if access to modern technology was provided.  

After opening up the sector for Indian private sector participation, 42 FDI proposals were approved in defence sector for the manufacturing of various defence equipment. The government also issued 439 industrial licenses to private companies till March 2019 for the manufacturing of a wide range of defense items. But, to date no big-ticket MNC investments have been made in India,  barring few offset contracts by Indian companies for MNCs.

Amit Kalyani, deputy managing director at Bharat Forge, said the higher FDI in defence will take the Make in India journey a step further. “It will create larger technology capability, overall competitiveness in order to sell solutions not only in India but also for exports. It’s a plus for the whole ecosystem. We have relationships with various partners across the world. The move will allow them to step up their technology deployment. Once the lockdown is over, we can quickly chalk a strategy that enables us to take benefit of the relaxation in the FDI norms,” said he.

FDI Booster

• With better technology, MNCs at advantage in bagging contracts
• MNCs to set up base in India; may acquire local firms
• Local companies want more government orders
• India gives $100 bn of defence contracts a year

Experts said the Indian defence sector has a huge potential to attract FDI but with the current FDI limit of 49 per cent, the overseas investors were not comfortable sharing their technology without having the majority stake in the Indian JV company. “This was one of the reasons why the sector despite having the huge potential, could not attract many foreign investors. The proposed increase in the FDI limit from 49 per cent to 74 per cent is a welcome step which will see many investors investing in the sector,” said Devraj Singh, Associate Partner – Tax & Regulatory Services, EY India.

Experts said this will finally kick start the production of advanced defence systems in India. "Control over technology and manufacturing quality were the big concerns of foreign companies which should stand substantially addressed with this move," said Anuj Prasad, Partner & Head, Defence, Cyril Amarchand Mangaldas.

(With inputs from Shally Seth Mohile)

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