Will the new FDI norms hurt Indian private defence players?

Even after ‘liberalising’ the defence sector by increasing Foreign direct investment (FDI) cap from 26% to 49% nearly two years ago, little progress was seen in terms of investment in the sector. Government figures reveal that foreign investments worth only Rs 1 crore were made in the last two years in the defence sector.

Realising it were procedural issues that were hampering investment, the government has now allowed foreign companies to own 100% equity in the local defence sector through the government approval route where ‘modern technology’ is involved.

The point which affected investments in the country was the condition of access to ‘state-of-art’ technology, as the terms were not clearly defined. This prevented companies from committing to India as what comprises ‘state-of-art’ was unclear.

Government has also made FDI norms of 49% through automatic route applicable to manufacturing of small arms and ammunition as per Arms Act 1959.  Reports say that the move is expected to attract major firms such as Heckler and Koch, Beretta, Colt and IWI to India, which has a huge requirement of firearms for the armed forces, paramilitary as well as police forces.

The intention behind the move is to allow foreign companies to set up shop in India and make the country their manufacturing base which can be used to supply weapons not only to Indian establishments but also abroad. Several global defence manufacturers have shown interest in making India their investment base; among them are Eurofighter consortium and Sweden’s Gripen. US giants Lockheed Martin and Boeing are discussing the possibility of producing jets in India. While Lockheed has proposed F-16, Boeing has offered to make F/A-18s in India. There is however some controversy over the 40 year old F-16s which are older generation aircrafts with few buyers.

Summing up the government’s mood, Union minister Rao Inderjit Singh pointed out that the government would clear anyone who sets up industry and provides employment, which would give a boost to the ‘Make in India’ programme.

There is, however, some apprehension among private sector players. In an interaction between industry and the government, lack of orders for the private sector was highlighted. A data points reveals the frustration of private sector players. Public sector shipyards have been given orders worth Rs 1.24 lakh crore in the past two years. In the same period, the private sector has received orders worth barely Rs 2,000 crore. Though public sector players have received the orders they are not outsourcing it to private players was another grouse. Industry representatives pointed out that over the past two years, not a single Rs 100 crore-plus order was placed by PSUs to any private defence manufacturer. 

Allowing 100% FDI will also take the opportunity away from private sector players as foreign manufacturers will prefer coming in on their own rather than going in for a joint venture and share their profits. They would rather get their work outsourced, thus satisfying the offset clause also. There might be some players who would prefer having a local partner to start with in order to learn the Indian ecosphere.

While the overall policy of allowing 100% FDI for domestic manufacturing is definitely better than importing, it seems private Indian players have been dealt a weak hand. Many companies were gearing up to take advantage of opening up of the defence sector, but allowing foreign players to directly compete with Indian players with the latter not equipped with the necessary technology would leave them hobbled. Unless Indian companies demonstrate their capabilities of the latest technology products, they will have to be satisfied by being a supplier of parts.