The FDI illusion

The defence sector needs much more than increased foreign direct investment

Written by C. Uday Bhaskar | Updated: July 6, 2016 12:51 am
FDI, india FDI, FDI india, India FDI news, FDI defence, FDI caps, business news, India Foreign Direct investment, india news, FDI in defence The 100 per cent ceiling is not very different from what the UPA had announced, but the many caveats and procedural constraints ensured that the initiative was not very successful in attracting foreign capital.

The successful induction of the first two Tejas light combat aircraft (LCA) on July 1 into the IAF, pending final operational clearance, provides the appropriate backdrop to the recent announcement of the Narendra Modi government to allow 100 per cent FDI in the defence sector.

This policy announcement is being heralded as the fillip that India’s moribund military indigenisation effort needs and that very soon Make in India will gain robust traction. However, this is an arduous path. India’s many institutional deficiencies and distinctive cultural DNA traits may make this highly desirable goal more elusive than imagined.

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The 100 per cent ceiling is not very different from what the UPA had announced, but the many caveats and procedural constraints ensured that the initiative was not very successful in attracting foreign capital.

The Tejas success, which is to be commended, is illustrative of the mindset that has crippled India’s indigenous defence industry for decades. The LCA programme wherein India would design and build its own combat aircraft dates back to 1985 and the heady Rajiv Gandhi years. Yet, the reality is that it took 31 years for the first two aircraft to be inducted, albeit in a sub-optimal manner, and it merits notice that both the engine and the primary radar are imported. Could the Tejas have been completed sooner had the 100 per cent FDI route been adopted earlier? And the related question is: Will the current 100 per cent ceiling make that much-needed difference?

The LCA apart, two other recent revelations provide the context for the FDI challenge. The Indian Army is the second largest in the world and yet for decades on end, India has been less than successful in designing and manufacturing its own rifle. What has been produced — the INSAS (Indian Small Arms System) — is sub-optimal. Currently, the army is reportedly facing a massive shortage, including that of ammunition and bullet-proof vests. Consequently, India is one of the largest importers of military inventory. Over the next decade, India will allocate over $ 200 billion towards acquisition and modernisation. A truly competent and nimble policy making body would be able to prioritise and attracting investment

But the sad reality is that the Indian defence leadership is clueless about how best to invest such a large sum of money over a decade with foreign participation and add tangible capacity to the military in a sustainable manner. Yes, stove-pipe wish-lists do exist. But what is missing is the holistic institutional integrity and multi-ministry competence that can envisage a national systems-engineering equivalent.

Thus, the 100 per cent FDI ceiling in defence, while being welcome, will have to be preceded by some very rigorous introspection about existing inadequacies. The holy grail of indigenisation can be attained only if the vast resources of the Defence Research and Development Organisation and Defence PSUs are dis-aggregated and re-cast on the lines of successful models that exist in countries such as Israel. A DRDO-centred, incremental approach will not succeed.

PM Modi needs to mobilise young entrepreneurial Indians to undertake cutting-edge defence research. Concurrently, with defence budgets likely to shrink in real terms, there is an urgent need to create a cadre, within the ministry of defence, equipped for such onerous responsibilities.

The writer is director, Society for Policy Studies, New Delhi

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