Foreign funds hit a low in defence sector

Statistics reveal that despite having promoted defence as one of the prime sectors under the ‘Make in India’ initiative, the sector has contributed zero per cent of the total FDI inflow in the country.

Written by Pranav Kulkarni | New Delhi | Published:July 22, 2015 12:56 am
Nirmala Sitharaman, Commerce Ministry, Nirmala Sitharaman, Sidharth Birla, Ficci, foreign portfolio, FPI, FPI, FPI investment, foreign investment, foreign investment defence sector, defence sector FDI, foreign investment defence, Indian express Commerce Minister Nirmala Sitharaman (right) and Sidharth Birla, Immediate Past President, Ficci in New Delhi on Monday. (Source: PTI)

Commerce Minister Nirmala Sitharaman may have justified retaining the existing sub-cap on foreign investment in the defence sector by saying that the government does not want fly-by-night operators in the “sensitive sector”, but statistics reveals that a year since they raised the cap to 49 per cent, the defence industry has only managed to bring in a miniscule Rs 48 lakh of foreign investment, leaving it virtually deprived of foreign investors.

The statistics further reveal that despite having promoted defence as one of the prime sectors under the ‘Make in India’ initiative, the sector has contributed zero per cent of the total FDI inflow in the country.

According to monthly data released by Department of Industrial Policy and Promotion, the defence sector has drawn the least foreign investment in the last year. In fact, a few lesser-known industries — ‘mathematical surveying and drawing instruments’ and ‘glue and gelatine’ — have attracted more investment than defence, which contributed just USD 0.08 million (Rs 48 lakh) FDI of the total inflow of USD 44,877 million. Figures reveal that since 2000, when the FDI cap was 26 per cent, the country’s cumulative inflow was Rs 24 lakh in 2011, Rs 17.68 crore in April 2012, Rs 24.36 crore in April 2013, and remained unaltered during the UPA years.

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Interestingly, while the sector consistently ranks 62nd (out of 63), ahead of only the “coir” industry, increasing the FDI cap has not succeeded in improving its position. According to a defence source, the 49 per cent cap is insufficient to attract investors who do not intend to transfer critical technology to another partner without having the ability to exercise control over the joint venture.

The hesitation by global defence manufacturers in bringing investments into a technology-heavy sector such as defence production is linked to the fact that they do not want to end up becoming minority stakeholders in a joint venture with an Indian player. As a result, the transfer of technology is a bone of contention.

Foreign defence sector players also have serious reservations with the offset guidelines. As a result, the JVs that have been inked so far have largely failed to take off and has effectively contributed to the dismal investment inflow into the defence production sector.

Amit Cowshish, a former financial adviser (Acquisition) in Defence Ministry, said the lacklustre attitude of foreign investors towards Indian defence business is due to absence of policy framework and lack of orders. “People will invest only if they see orders. There is no investment as there is no buying. Most of the JVs created have been on paper. There are no orders. Further, the make procedures under the defence procurement policy are forever under revision. They would invest only if they see business prospects.”

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