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OPINION: Why 100% FDI In Defence Is A Good Idea, But Only On This One Condition

Posted on June 12, 2014 in Specials

By Bala Sai:

Yes, yes, I hear you. I know India missed the Industrial Revolution. I understand that our sepoys were still learning to wield guns even as two world wars were fought, resulting in an unprecedented development of technology in weapons and manufacturing, sucking the entire first-world-humanity into a time-warp into the future. Is that your excuse again? Well, I’ll let big brother China answer that.


FDI, in broad strokes, is all about letting foreign companies set up shop in India, either alone or by hooking up with existing Indian companies. Every time it is proposed, we debate about it, in the lower house, upper house and at least a million other houses. We read deep, thoughtful articles in newspaper editorials and nod sagely. Once (if) we get around to finally approving it, we slump down in our seats, rest our heads on our collective elbows and watch dreamily, as huge capital is pumped into the economy, hoards of new jobs are created, income is generated through profits and exports and a variety of assorted taxes. If we are still awake by then, we might notice our indigenous companies disappearing silently, slipping through the cracks between our fingers – the cracks being corruption, negligence, infrastructural issues, etc. But why do we care, when the foreign giants guarantee a good night’s sleep?

Today, the debate is for 100% FDI in defence. Defence, I must add is a sector that we have thus far valiantly defended against foreign invasion, hoping and wishing that one day, our indigenous manufacturing will suddenly begin churning out light sabers and plasma guns. The results are for all to see and behold.

Just one day after Modi’s new government was sworn in, as the country reveled in a state of hope and optimism, a fighter aircraft of the IAF on one of its routine rounds crashed in Kashmir, killing the pilot on the spot. It was a MiG-21, a decommissioned Russian-built aircraft famously dubbed as ‘flying coffin’, an ode to its terrible record. In 2012, the then Defence Minister AK Antony had observed that more than half the country’s fleet of 872 MiGs had been lost to crashes over the last four decades. The past two years alone have witnessed more than a dozen fighter aircraft crashes in the country.

The Indian Navy ran ‘headless’ for over 50 days after its chief, Admiral DK Joshi resigned, following INS Sindhuratna, an Indian submarine catching fire off the coast of Mumbai, injuring seven officers and leaving two missing. It was the 10th accident involving an Indian warship in seven months.

Just six months before, another submarine, INS Sindhurakshak famously exploded and sank while docked in Mumbai, killing 18 crew members. The incident prompted China’s Government-run newspaper, ‘The Global Times’ to scoff with impunity at the Indian Navy, even dubbing it as ‘paper tiger’.

“Our tanks are out of ammunition, the air defence is obsolete and infantry is short of critical weapons.” our then Army Chief General V.K. Singh lashed out, in his 2012 letter to PM Manmohan Singh, lamenting the sorry state of affairs plaguing India’s defence sector.

A 2012 article by Rahul Bedi highlights the dire straits of our defence equipment. “India’s night-fighting capability is virtually nonexistent. Over 70 to 75 per cent of its armor fleet is incapable of operating in the dark. For the last three years, the army has not fired a single 9 mm carbine because it does not have the ammunition. The army has not conducted practice firing on its tanks – as it does not have ammunition. Artillery rounds too are in short supply. The Indian Army is using air defence guns from the 1950s. It has not updated any of them, which were inducted soon after independence.”

The current state of affairs can be attributed to acute economic and procurement problems. With over a whopping 70% of equipments including all the critical weapon systems being produced and assembled abroad, India holds the dubious distinction of being the largest arms importer in the world. As a result, the currency exchange rate plays a crucial role in transactions and can impose severe roadblocks for the government.

The procurement process too, is riddled with problems like allegations of corruption and bureaucratic hold ups. Over $100 billion of hardware purchases have been stalled for a decade and has resulted in the degradation of the military’s fighting capability. Numerous controversies from Bofors to Augusta Westland have added more complications to the already tortuous procurement process.

Despite preferential treatment by the ministry, our Defence Public Sector Undertakings (DPSU) have consistently failed to keep pace with the technological advancements, fighting a constant losing battle against rapid obsolescence. According to Maj Gen Mrinal Suman, head of the Defence Technical Assessment and Advisory Services Group of CII, indigenous competence is practically non- existent, and “the DRDO is unable to develop a single system in the promised time-frame and conforming to the accepted parameters. Even after spending crores of rupees, the only success it has to its credit relates to replication of some imported products (fancifully called ‘reverse engineering’ and ‘indigenisation’.)”

For instance, the Chinese newspaper ‘Global Times’ challenged India’s claim that the INS Vikrant is “indigenous,” calling it a “brand of 10,000 nations” because the ship is said to have used French blueprints, Russian air wings and U.S.-made engines.

Amid huge fanfare and criticism, the previous NDA government introduced FDI in defence in 2001 and capped it at 26%. With that, they also granted the interested companies immense mythical superpowers like no significant control over their own companies, no permission to freely expand their capacity or product range, no guarantee that the government will even buy their stuff, and no permission to sell their goods to anyone else, plus the added luxury of no permission to export freely. It seems a bit unfair that we still expect them to share their technologies.

Stunningly, global arms manufacturers found India an unviable market and we received zero proposals at least until 2004. Till date, India has received less than US$5 million of FDI inflow in defence manufacturing during the last decade. As the DIPP under Nirmala Sitharaman moots FDI to the tune of 49%, 74% or 100%, furious voices have risen to condemn the move.

A famous point is that we are risking India’s national security. Proponents of this theory fear that once foreign countries dominate production in India, we might face problems if their parent countries decide to shut down production during a crisis situation. A valid point, no doubt, but considering that India is already importing most of its weapons with production companies having zero stake in our country’s well-being, it is actually safer to have them worried for their investments, considering FDI inherently binds investing companies into a long lasting relationship with the host country.

Another fear is that of our indigenous companies facing extinction. In its 2010 paper, FICCI stresses that countries like US and Germany are actually cutting down their FDI, in favour of their indigenous industries. Replicating such a move would be a great tactical decision, if our indigenous manufacturing industry is as developed as theirs, or our defence market as saturated. Instead, we need to look at how we can exploit FDI to strengthen our indigenous production by learning from their technologies and organization.

In the same paper, FICCI also points out that allowing 100% FDI in industries like telecom have done little good to our own companies, as Indian participation has only further shrunk. It also questions the theory that 100% FDI leads to effective technology transfer. FICCI also defends our current policies and FDI cap, in its view that with US and European defence markets being saturated and their defence expenditures declining, India and China will attract investors, whatever our policies are. Is it a risk worth taking? is a question we need to ask ourselves.

Today, China – a country that started out in the same footing as us in early 1950s, is the fourth largest weapons exporter in the world. It has a robust and growing defence manufacturing industry more popular for cheap weapons than advanced technology. India’s failure, once again, has resulted from improper management of our abundant resources, and our various internal governance issues. Increasing FDI cap might benefit our economy and strengthen our defence for the time being, but we will get a true happy ending only if we use it to simultaneously develop our indigenous industry and slowly shed our dependence on the foreign investors. How many alarm bells do we need to wake up to this fact, remains to be seen.