FDI levels in defence need to be raised, FII won’t do
With more than 600 vendors, around half of whom are foreigners, in the capital for Defence Expo 2014, this is as much about the size of India’s defence procurement—estimated to grow from $16 billion right now to around $80 billion annually by 2025—as it is about the opportunity of manufacturing in India. More so since the stated plan of the government is to move towards a target of achieving 70% of the country’s defence needs from within the country. Given the current share is under 30%, that appears a tall order. Which is why the government’s plan was a two-pronged one. First, it came out with an offsets policy that mandated a certain proportion of local production for anyone that wished to supply defence equipment to India. Two, the ministry came out with the concept of Raksha Udyog Ratnas (RURs), or private firms that would be chosen on the basis of their capability to be part of India’s military-industrial complex as it were—Bharat Forge, L&T, Mahindra & Mahindra, Tata Motors, for instance, were the obvious candidates given they are already working in the field. These RURs, once chosen, were to be on a par with defence PSUs. These RURs were to be given work from the defence forces, starting with the simpler armaments and then moving on to the more complex ones.
Yet, the role of the private sector remains a small one, and RURs are finding that the field is nowhere as level as they thought it would be. While pointing out that a vibrant local defence production base could create upto 1 million jobs in about five years, a CII-BCG study points out that the predominantly PSU base also means the productivity of the sector is very low. Defence PSUs have a productivity of around half of key manufacturing industries in the country. The other, more vital, issue concerns that of technology transfer. Given how the defence forces need state-of-art technology, Indian manufacturers simply cannot get this without greater FDI levels—why would any foreign manufacturer bring in cutting-edge technology in a firm it controls just 26% of. None of this is to say that top Indian firms cannot develop technology on their own—they can, and they have—but if there is to be a vibrant enough local base of producers in India, allowing 51% FDI levels is critical. The government’s plan to work on allowing more FII—to add up to the same 49% or 51%—simply won’t do the trick.