Abysmal Response To India's FDI Initiatives

Analysing reasons for the lukewarm response of the foreign companies looking at the dynamics of FDI, MAJOR GENERAL MRINAL SUMAN suggests the ways to formulate a system of motivational incentives to channelize foreign investments.

- Mrinal Suman

India has the dubious distinction of being the largest buyer of conventional weapons in the world as the indigenous defence industry is in a pitiable state. The track record of Defence Research and Development Organisation (DRDO) has been abysmal to say the least. Inefficiency of the public sector is equally proverbial. In addition, every effort is made by the public sector to inhibit the entry of private companies in the defence sector, lest they provide competition to its sloppy functioning. Resultantly, India has failed to develop contemporary defence systems through the indigenous efforts. It is beyond the competence of the indigenous industry to close the gap.

Incontrovertibly, India needs defence technologies desperately. The only course open is to import them and then use them as a spring board for developing newer technologies indigenously. While opening the defence sector to the private industry in May 2001, the government allowed a maximum of 26 per cent Foreign Direct Investment (FDI) component. Detailed guidelines were issued in January 2002. They were considered highly dissuasive, both in intent and content. Foreign investors showed no interest at all.

A proposal to raise FDI limit in the defence sector to 74 percent was mooted in May 2010. The services had no hesitation in recommending 74 or even 100 percent FDI, albeit with adequate policy safeguards in place. However, both MoD and the industry opposed the move. MoD wanted to protect the public sector while the industry viewed the entry of powerful foreign manufactures as a threat to their business interests. The proposal was shelved.

With the change of the government, FDI cap through the automatic route was raised to 49 percent. Higher FDI was also allowed for the state-of-the-art technology with the permission of the Cabinet Committee on Security (CCS). Unfortunately, foreign investors were still not enthused.