FDI can work well in defence production

Foreign Direct Investment Can Work Well In Defence Production

It turns out that most of the FDI coming to India is into subsidiaries of foreign firms. And so far, it has not been that huge. Indian Express journalist Ms. Shruti Srivastava quotes a Care Ratings analysis that shows a cumulative FDI inflow of just $195.6 billion between April 2000 and April 2013. That works out to a modest $15 billion per annum pro- rata. It is not the kind of investment to set the balance of payments right in this decade or the next.

Green- field FDI, such as the much anticipated Korean POSCO venture in Odisha, touted at some $12 billion when it was announced years ago, is now near dead in the water.  Arcelor Mittal’s Rs.50, 000 crore venture has just been cancelled because of interminable delays on every aspect. Of course, the demand for steel is down with the sharp recession in the West too.

But, irrespective of the external environment, our ground realities are inexplicably grim, and most unwelcoming of the things foreigners seek: transparency, predictability, consistency in decision-making, no retrospective taxes, and indeed a benign tax policy.

With our once buoyant domestic economy tanking and refusing to grow, FDI is not going to be forthcoming in all except the most lucrative areas, and of course, incrementally, to expand the foot print of a subsidiary when it is called for.

So the big bang announcements from the Government in the penultimate hour may largely find no takers. Telecom may have been opened up to 100% for FDI, but it is reeling under massive debts and huge costs, some of which are to do with Government licenses and spectrum allocations. So it is not going to be a shoo-in.

Vodafone which came in on the back of the India story, buying in at steep valuations, is now hoping for future profitability according to its expat CEO. It is also under threat with huge tax demands for its purchase of the Hutch holdings. Vodafone’s fate is no doubt being watched with trepidation by other would- be entrants. And in any case, no one and nothing is likely to come in before the general elections. This Government has simply left it too late.

The one place where we could score is in defence production. We have hedged our intentions with the case-by-case clause beyond FDI at 26%, but we have nevertheless shown the way up to 49%. This is not only good news for the world’s high-tech armaments manufacturers because India’s shopping list in Defence Purchases is amongst the biggest in the world, but also good for India’s security.

With the rupee tanking and our foreign exchange reserves depleting, the economy slowing, and deficits growing to the point of inviting an international ratings downgrade to junk status; we badly need to manufacture our high value defence items in- country.

We cannot afford to pay for them in the international arms market any more. This was the situation when we were closely allied to the USSR and had no foreign exchange, and it is rapidly coming around to a similar situation afresh today.

The other point is that the Government is possibly recognising at last, that it neither has the resources nor the know-how to run our domestic defence production without help. The track record shows a long list of delays, cost overruns, failures, and lack of technical know-how. This state of affairs has probably suited the middle- men and arms merchants just fine, but has done little good to the country.

Several leading private players have been keen to get off the ground in this lucrative area of defence production, and despite resistance from some quarters probably due to vested interest garbed in concerns of security, the matter has now been moved a little both conceptually and in terms of policy.

Consider the numbers: India’s defence purchases are expected to run up to $ 200 billion, up 54% on the current annual defence budgets, by 2021, according to  IHS Jane’s.

It is also the stated intent of the Government that the domestic defence industry should be able to produce the full-range of high-tech weaponry that Indian armed forces may require. But so far, the attempts of the Public Sector units, which have enjoyed an undeserved monopoly in defence production, have made a complete travesty of this objective.  We are still importing 70% of our defence purchases. The plan was to be largely self-reliant by 1991, a projected 85% to be made in India. Not only that, but what we do make is largely inferior, manufactured at inordinate cost and after humungous delay.

This cannot be all attributed to incompetence alone because there is quite a lot of evidence that points towards willful retardation of indigenous initiatives in order to serve the interests of foreign arms-merchants and nations.

With projected private sector involvement in defence production assisted by foreign players, this sordid and depressing scenario may begin to change. At any rate, if implemented vigorously by the in-coming Government, it promises to ramp up the quantum of FDI into the country substantially. Mr. Narendra Modi has spoken on his commitment towards making this happen if voted into power, and he is just the man to do so.

(869 words)

July 18^th, 2013

Gautam Mukherjee