FDI in defence: Removing the shackles

Getting rid of restrictions on foreign direct investment will promote technology transfer and attract top global companies

By PwC
Updated: Oct 13, 2016 10:13:50 AM UTC
defence
It is felt that India’s massive modernization programmes leave enough space for growth of both the domestic enterprises and foreign wholly owned subsidiaries (Photo: Reuters)

With an increase in foreign direct investment (FDI), the government has made its intention clear that it wants India to be a regional manufacturing hub. Due to the current FDI restrictions, India was losing out on a number of foreign companies who were keen on developing India as a ‘home market’, to other destinations like South Africa, Mexico, Morocco, Southeast Asia, etc. Foreign OEMs were hesitant in coming forward to invest in the Indian defence market, with or without key technologies.  This move will also promote technology transfer through the spillover effects of FDI, which are bound to occur when foreign wholly-owned subsidiaries offer subcontracts to the domestic industry.

It will also ease out the issue of fulfilment of offset obligations where the capacity of Indian industry to absorb offsets was being questioned. With limited defence infrastructure and non-existent exports, absorbing offsets worth $2-3 billion annually was a challenge which had led to the ministry of defence increasing the offset threshold limit to Rs 2,000 crore.

In the past, the Indian private sector has been raising objections against increasing FDI as it felt that it could potentially lead to the crowding out of India’s domestic industry. However, it is felt that India’s massive modernisation programmes leave enough space for growth of both the domestic enterprises and foreign wholly-owned subsidiaries. It can be said that even with 100 percent FDI, a few foreign companies will still prefer to establish a joint venture in India, to seek the benefit of the local knowledge and market access of domestic companies. The present removal of FDI cap is likely to be first exploited mainly by lower tier foreign defence suppliers, ie the Tier 3 and Tier 4 suppliers, who have been waiting in the wings.

The FDI limit for the defence sector has also been made applicable to Manufacturing of Small Arms and Ammunitions covered under the Arms Act 1959. However, obtaining a licence to manufacture still remains an issue here for all domestic manufacturers and will need to be resolved first before any benefits of increasing the FDI cap can be taken.

- By Rajiv Chib, Director Aerospace and Defence

The thoughts and opinions shared here are of the author.

Check out our end of season subscription discounts with a Moneycontrol pro subscription absolutely free. Use code EOSO2021. Click here for details.

Post Your Comment
Required
Required, will not be published
All comments are moderated