FDI in defense sector-Is it warranted?

Foreign direct Investment refers to the foreign companies investing in Indian companies and its production in the long term. The central government has allowed 49 percent FDI in defense sector under automatic route, 75 percent involving Transfer Of Technology(TOT) and 100 percent where significant new technology is involved. The essay deals with the reasons as to why relaxation in FDI norms in defense sector might still be inadequate to attract foreign players in the sector.

First, in the defense sector, the government is the sole procurer of defense equipments. The government do not make orders on a continuous basis either for domestic needs or for defense-export conventionally. For instance, the Dassault-made Mirage 2000 was inducted in late 1970s. After a long gap of nearly three decades, the Government decided to induct Rafale fighters in its fleet. In such a situation, the foreign company would be disincentivised to expand its infrastructure in India.

Second, the foreign companies often raise concerns about the offset policy as mandated in Defense Procurement Policy(DPP). That said, the offset rule states that 30 percent of the contracted amount has to be invested in local manufacturing and providing local employment. In a situation where the co-partner has sufficient bargaining power(as in the case of Hindustan Aeronautics Limited), the foreign company is wary of losing control over its technology and intellectual property.

Thus, FDI is not the panacea for all ills in defense sector. Self-sufficiency does not necessarily mean merely increasing the content of indegenisation in producing defense equipments and creation of jobs locally. Rather, the defense industrial base unit needs to be strengthened so that we are able to independently produce critical defense components without having to import from foreign nations. This will increase our capacity for technology absorption. We have improved our credibility in space sector against all odds through strong political will and persistent efforts. There is no reason why we can’t achieve self-sufficiency in high-end defense sector.