New Delhi, May 17 (Inditop.com) The question of capping foreign investment in India’s defence manufacturing sector was thrown wide open Monday with a working paper circulated by the commerce and industry ministry suggesting this be raised to 74 percent, from the existing 26 percent, to encourage established players enter the field.
“The established players in the defence industry should be encouraged to set up manufacturing facilities and integration of systems in India with FDI (foreign direct investment) up to 74 percent under the government route,” says the paper, circulated among different stakeholders in the field for their views and suggestions by July 31.
The paper also has a caveat: “The views expressed in this discussion paper should not be construed as the views of the government. The department (of industrial policy and promotion that has generated it) hopes to generate informed discussion on the subject, so as to enable the government to take an appropriate policy decision at an appropriate time.”
The defence ministry often says that the existing cap could be raised to 49 percent in selective cases but has been reluctant to do so when proposals are actually made.
However, the working paper paper notes that the present cap has failed to attract state-of-the-art technology in the defence sector. An increase to 49 percent “will not give any additional say to the foreign investor in the affairs of the company” under India’s Company Law, the paper says.
Noting that raising the cap to 49 percent “will not really help us in getting the best technology partners to invest in India”, the paper says that by merely increasing the limit to 49 percent “we may be accused by posterity of doing too little and too late”.
Therefore, “in case we really want to have the state of the art technology, we have to permit anything above 50 percent if not 100 percent. It may, therefore, be desirable to allow either 100 percent or 74 percent as in the case of the telecom sector”, the paper says, pegging its recommendation at the latter figure.
It notes in this context that indigenous R&D “has not kept pace with the requirements of present day warfare and manufacture through transfer of technology to public sector units (PSUs)/ordnance factories (OFs) has proved to be an ineffective and slow process”.
In most cases, the transfer of technology itself “was not complete, as the suppliers were more keen to push their own product, rather than indigenizing the production in India”.
“Also, in the absence of any incremental technology, the OFs could not modernize or upgrade their platforms” and were “getting more and more marginalized and becoming irrelevant as far as the goal of modernization of the armed forces is concerned. This is bound to result in more and more dependence on imports”, the paper notes.
This has led to a situation in which even when defence products are manufactured domestically, “there is a large component of imported sub-systems. While the import dependence is very high, there is a growing perception that the procurement regime has not kept pace with our requirements and there are very few requests for proposals (RFPs) for sourcing of defence equipment that have fructified in a timely manner”.
Thus, the defence equipment available today “is of old vintage and needs replacement. Only 15 percent of the equipment can be described as state-of-the-art and nearly 50 percent is suffering from obsolescence.
“There is, therefore, an urgent need to enhance the deterrent and operational capability of the armed forces through upgradation/modernization of existing equipment, as well as acquisition of state-of-the-art equipment,” the paper says.
Reinforcing its suggestion for raising the cap to 74 percent, the paper notes that most of the global defence equipment suppliers “are only system integrators and they manufacture various equipment keeping in view the requirements of a particular order placed upon them”.
“Since the companies keep on winding-up their operations and changing hands, it is virtually impossible to ensure maintenance and product support through their life cycle. This problem exists, in particular, with indigenous equipment manufactured with critical imported components. This raises the issue of the reliability of defence supplies in times of need.
“Since the indigenous manufacturing capabilities are not well developed, it is difficult to repair, modernize or upgrade the defence equipment. There is, therefore, a need to have a vibrant defence industry within the country to produce state-of-the-art defence equipment,” the paper says.
Defence industry being highly technology-driven and capital-intensive and since it may take some time for domestic companies to acquire a technical edge, “it is important to consider the vital question of accessing the technology through the modality of allowing foreign companies to set up production bases/ facilities within the country itself”.
“Manufacturing within the country, through foreign capital, with full transfer of state-of-the-art technology will be a better option than importing the equipment from abroad,” it adds.
It also cautions that if imports continue at the present level of 70 percent, the role of defence PSUs and the ordnance factories “would only be further marginalised”.
However, if major arms and weapon manufacturers set up their units in India, “there is strong possibility” that they will collaborate with defence PSUs and ordnance factories and would certainly like to outsource from the existing facilities in India.
Thus, if the FDI policy is properly leveraged by optimally factoring the outsourcing possibility, “we can actually revive our defence PSUs and ordnance factories and make them relevant” to the armed forces modernization process.
The flow of foreign capital and technology can, therefore, be used as a tool for strengthening the defence PSUs and ordnance factories.
