FDI in defence: Is the govt falling short on promises?

Last year, the Modi government was gung-ho about its decision to raise the defence Foreign Direct Investment (FDI) cap to 49 percent with the purpose of making India a hub of integrating state of the art weapons system. The policy move was followed by announcements of several joint ventures and intentions of investing in the sector. But a hard look at the data, so far, shows a paltry hike in dollar inflows into the sector. The global investors still seem to be skeptical about setting up base in India.DEFENCE FDI: MUTED INVESTMENTSData shows that in the period between September 2014 to June 2015 period, only USD 9.5 million have flowed into the sector. This is just a notch better than the core sector and is lower than what sectors like drawing instruments got. That's not all. Post liberalization of the FDI policy, the Foreign Investment promotion Board (FIPB) cleared defence FDI proposals of less than USD 15 million. Experts believe that defence FDI inflows will not improve till foreign investors are allowed majority control. “Unless the FDI cap is increased to 74 percent and Procurement period is brought down to 2 years, I don't see any increase in FDI,” Amber Dubey, Head, Aerospace & Defence, KPMG said. Foreign investors want assured orders from the Ministry of Defence, the sole buyer of defence products in India. LK Behera, Research Fellow, Institute for Defence Studies and Analyses (IDSA) said: “The Buyer is not interested in giving assurance that it would buy the products manufactured. Without that foreign companies won’t be interested to come.” JVs focusing only on local marketsThe FDI liberalisaion surely created a buzz, as demonstrated by the 30 odd Joint Ventures (JVs) - involving companies like Reliance Group, Tata Group and the Mahindra. But experts point out, these tie ups are focused only on the local market. “Most JVs are focusing on Indian orders and in defence, one cannot just focus on one consumer.” Dubey said. He added that India has become a supplier of non-critical and non-strategic sub-assemblies rather than becoming a systems integrator. As a result, experts maintain that instead of becoming a systems integrator, India could at best could become a low key partner in the defence value chain. C Uday Bhaskar, Director at The Society of Policy Studies told CNBC-TV18 that global defence companies are spooked with issues such as the Vodafone and retro tax case. Post the Bofors scam, India perceives global companies as “corrupt unless proven otherwise,” he said. Bhaskar said the government needs to work on compressing timeline for permissions, better incentives for foreign investors and to not regard them as guilty unless they prove themselves.However, the government maintains that India is set to see huge defence FDI inflows after the procurement norms are tweaked which should happen over the next two to three months.“I think a lot of more orders need to flow from the defence ministry. The defence offset policy is at a very advanced stage. A number of decisions have been taken for the future as far as offset policy is concerned,” Amitabh Kant, Secretary, Department of Industrial Policy & Promotion (DIPP) said. While Defence Minister Manohar Parikar is taking speedier decisions in the Defence Acquisition Council and the DIPP has pitched in with easier licensing norms, the Modi government will have to take a deeper and comprehensive exercise to tweak procurement rules and the FDI policy to make India a hi-tech defence integration hub.