Tag Archives | FDI cap

Barking at the top of the list

Don’t want India to be world’s top arms importer? Increase the FDI cap in defence manufacturing.

“Why Has India Become the World’s Top Arms Buyer?”, screamed the headline at India Ink blog of the New York Times. Of course, the question itself is wrong. India is not the world’s top army buyer; it is merely the biggest arms importer in the world. At least, that is what the data produced by SIPRI for 2007-2011 suggests.

The headline may be misleading but it is borne out of a fundamental belief held by many left-liberal commentators. The usual “Guns v Butter” argument. As a poor country, India should not be spending so much money on weapons when the same money can help the vast swathes of poor and the downtrodden across the land. India tried to focus on development — at the cost of security — between 1947 and 1962.  The lessons of that military disaster with China have taken deep roots in the Indian psyche now. In any case, India spends less than 2% of its GDP on defence and around a quarter of that goes towards buying weapons every year. When you have China and Pakistan in your neighbourhood, and have to maintain presence in the Indian Ocean to safeguard your Sea Lines of Communication, half a percentage of GDP spent on buying weapons is explicable.

This leads us to the second strand in the argument, which is espoused by many conservative commentators. India must buy weapons but it should buy them only from Indian manufacturers. Of course, that is the ideal situation. But defence technology is not easy to master and India has spectacularly failed in its efforts to produce modern military equipment. Providing more money to DRDO and Public Sector defence manufacturers, which is what the government promises to do, is not going to make any difference. The rot runs deep and vested interests have led to government’s own restructuring plans, such as the Rama Rao Committee recommendations, either not being implemented or being implemented only partially.

Meanwhile, Indian private sector lacks the capacity and the resources to produce modern military hardware. The offset requirements, stipulated in the Defence Procuremeny Policy, were supposed to get the requisite capital and technology to Indian private manufacturers from their foreign counterparts. But neither has happened and the offset requirements have since been diluted. Even worse, the offsets are being used to billow the already bloated and inefficient public sector defence manufacturers.

Not that there is no way out of this conundrum. There is. India imposes a 26% FDI cap on defence manufacturing in India. Increasing that cap to 74% — or at least 51% — will motivate foreign manufacturers to shift production to India. They can take advantage of India’s cheap labour and technological base, while fulfilling the offset requirements of the Indian government. The larger benefits accruing to the Indian economy need not be recounted here.

There is, however, little chance that any increase in FDI cap will happen. The defence ministry is opposed to it. Indian trade bodies like FICCI and CII are not in its favour either. Many analysts will shoot the poisoned arrow of preserving India’s strategic autonomy to mortally wound this proposal whenever it is raised. Moreover, FDI is a politically taboo term in the Socialist UPA government, guided by the ideologues of the NAC.

Let us look at it in another way. India should not be buying weapons from foreign manufacturers but its own industry, both public and private, is incapable to producing these modern weapons. The next best alternative is to get the foreign industry to manufacture these weapons in India. That needs an increase in the FDI cap on defence manufacturing. If not, the status quo will continue. And so will the laments — and misleading headlines — every time SIPRI comes out with such a report.

Related post: What is the purpose of our defence acquisitions?

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