India looks to foreign investors to boost defence industry

India’s defence ministry has released a draft Defence Production Policy 2018 which proposes, among other things, raising FDI limits in 'niche technology areas' to 74% under the automatic route to boost local manufacturing under the Make in India initiative. Suggestions have been invited from stakeholders by March 30, after which the ministry intends to finalise the policy by the end of April.

India is the world’s biggest arms importer according to the Stockholm International Peace Research Institute. A big focus of policy has been to reduce dependence on imports and encourage greater self-reliance in defence production. 

The Defence Production Policy 2018 has an ambitious vision to make India one of the top five countries in the world in aerospace and defence. It aims for greater self-reliance in manufacturing fighter aircraft, medium-sized and utility helicopters, warships, land combat vehicles, autonomous weapon systems, missile and gun systems, small arms, ammunition and explosives, surveillance systems, electronic warfare systems, communication systems and night-fighting enablers. The new policy also intends to create a facilitative environment that encourages a robust, dynamic and competitive defence industry as part of the Make in India initiative. 

Attracting FDI through a more liberal policy regime is a significant component of this policy. Currently, the FDI cap is 49% under the automatic route which can go up to 100% with “government approval wherever it is likely to result in access to modern technology”. Interestingly, since FDI in defence has been allowed, India has attracted only $180,000 in foreign investments from April 2014 to December 2017, according to a written reply in the Lower House of Parliament by the minister of state for defence on March 7. The minister went on list 18 cases of FDI and joint-venture proposals approved by the government, half of which are located in the state of Maharashtra. 

But will raising the FDI limit further through the automatic route have any effect? The small levels of FDI received so far indicate a the lack of clarity in the policy regime. Critics point out that prospective foreign investors with proprietory and advanced technologies are unlikely to come in at 100% when what constitutes modern technology has not been clearly spelled out. The Defence Production Policy 2018 for its part does not shed light on what are the 'niche technology areas' either. FDI has not flowed into defence also as many potential partners in India’s private sector do not have the requisite experience to contribute to the success of the joint venture. 

N Chandra Mohan is an economics and business commentator based in New Delhi.