The Department of Industrial Policy and Promotion (DIPP) today proposed to increase the level of foreign direct investment (FDI) in the country’s defence sector to 74 per cent from the present cap of 26 per cent, in an effort to boost the domestic defence equipment manufacturing industry.
DIPP also made some strong remarks on the deplorable state of the ordinance factories (OFs) and defence public sector undertakings (PSUs).
The department, under the commerce and industry ministry, sought public opinion on the feasibility of increasing foreign participation in the defence sector, which would prove to be instrumental in transfer of know-how, resulting in the enhancement of technological expertise, it said in a discussion paper released today.
In the discussion paper, DIPP said it would be futile to increase the FDI cap from 26 per cent to 49 per cent, as had been demanded by industry bodies. “By merely increasing the limit from 26 per cent to 49 per cent we may be accused by posterity of doing too little and too late. Therefore, in case we really want to have state-of-the-art technology, we have to permit anything above 50 per cent, if not 100 per cent. It may be, therefore, desirable to allow either 100 per cent or 74 per cent, like in the telecom sector,” the note said.
DIPP also said the current level of 26 per cent, which was notified in Press Note 4 of 2001, dampened the need to bring in proprietary technology by the original equipment manufacturers (OEMs), depriving India’s access to high-end technologies. Greater inflows of foreign equity into the sector would also reduce the dependence of Indian compaies on fund requirements, thereby promoting their growth and expansion.
“Depending on what response we get from the public and inter-ministerial opinion, we would arrive at a consensus and send it to the Cabinet to be converted into a policy,” said DIPP Secretary R P Singh at an event organised by Ficci here today.
Increase in FDI limit in defence would also result in savings of foreign exchange, as a large part of it is spent on defence purchases, besides augmenting the country’s export potential. Referring to the defence equipment available today as “old vintage”, DIPP said: “Only 15 per cent of the equipment can be described as state-of-the-art and nearly 50 per cent is suffering from obsolescence.”
It also said the present regime in the defence procurement process had failed to keep pace with the need and requirements of the present day warfare. The DIPP also said if more imports were encouraged, the role of defence PSUs and OFs would gradually get diminished.
The discussion paper also said, with increase in FDI in the sector, major arms and weapon manufacturing companies would set up their manufacturing units in India, in collaboration with PSUs and OFs. Also, since most of the major manufacturers are system integrators, liberalising the FDI regime would lead to outsourcing from the existing facilities in India. Referring to the Kelkar committee on self-reliance in defence preparedness, set up in 2004, the paper underscored the need to increase FDI in defence.
“The discussion paper is definitely bold and upfront. However, there is no clarity on how defence equipment would be defined as some of them have dual usage in terms of military and civilian, like simulators. The FDI policy in the defence sector so far had been a complete failure. There is definitely a need for more FDI, otherwise international companies would continue to avoid India and would invest somewhere else,” said Dhiraj Mathur, India leader for aerospace and defence, PricewaterhouseCoopers.
Referring to the concerns cited by the Ministry of Defence (MoD), DIPP said the flow of foreign capital and technology could, therefore, be used as a tool for strengthening the defence PSUs and OFs. On the contentious issue of ownership and control of firms that deal in critical and sensitive part of the defence industry, it said: “We can refuse to permit FDI in the sector by refusing licence where the background of the company is suspect.”
