Commerce minister Anand Sharma has a point when he argues in favour of hiking FDI limits in the defence sector from the current 26% level to 49% or even 74% since, as he points out, in the decade since India opened up the sector, it has got just $4.12 million by way of FDI flows in the sector. Though India is tipped to become the world’s third-largest defence spender after the US and China by next year, and equipment spending is reckoned to be $80-100 billion in the next 5 years, large foreign suppliers of defence equipment are simply not interested in putting up supply bases in India. The obvious reason that comes to mind is that they are not confident of transferring critical technology in joint ventures in which they control only 26%. While many local firms engaged in defence production are not in favour of increasing FDI limits, and the defence ministry is of the same view, the question is where they are going to get the high-end technology they need even if the government were to hand-hold them in the manner it has done with various defence PSUs. Helping local firms through generous dole to help pay for the R&D they need may be a good idea, but there is little doubt it will take decades to fructify into something meaningful. Certainly, the pace of indigenisation will not be fast enough for India to meet its target of meeting 70% of defence needs internally in the next 5 years.
Defence production and R&D, it is obvious, are dramatically different from what is the norm in civilian areas, but a good example to look at is India’s auto leader Maruti. Till such time the company got bought over by Japan’s Suzuki Motor Corp, it was not even a small part of Suzuki’s global production chain—once this happened, Maruti became an integral part of the chain and Suzuki has even set up a test track to help Maruti in its design and R&D efforts. Automobile exports now take place from India and, thanks to Suzuki to begin with, India now has a well-developed auto-ancillary base. It can, of course, be no one’s case that just hiking FDI limits will bring global defence majors flocking to the country. This requires Indian manufacturing to be globally competitive, labour laws rationalised and fixing of several other issues that have hobbled the country’s industrial base. At a time when India is importing most of her defence needs, what’s not clear is what purpose the 26% FDI cap achieves—indeed, what the cap does is to deprive the country of valuable foreign exchange as well as ensure lakhs of jobs don’t get created within the country.