July-aug 2016With the increase in FDI, the government has made its intention clear that it wants India to be a regional defence products manufacturing hub. Earlier foreign OEMs were hesitant in coming forward to invest in the Indian defence market, with or without key technologies as they were required to form joint ventures with domestic firms with minor share holding. With the amendment, an OEM even lower tier foreign defence suppliers, i.e. the Tier 3 and Tier 4 suppliers can independently plan and implement operations in India with higher ownership. Joint ventures in India, are required to seek the benefit of the local knowledge and market access of domestic companies. This move will also promote technology transfer through the spillover effects of FDI, which are bound to occur when foreign wholly owned subsidiaries offer subcontracts to the domestic industry. Several domestic companies have obtained Industrial Licences, but lack of expertise has held them back from developing production facilities. This can widen the vendor base for local companies, increase competition among suppliers for business, and also lead to better compliance with offset obligations.

            While FDI is no doubt an important aspect for India's growth and security on the balance of payments front, it is not a necessary condition. Policy changes without visibility on the revenue front may still make investors hesitant to invest. The experience and path followed by  other countries can also be helpful in appreciating the role that FDI plays in developing the indigenous industrial base beside boosting core national priorities such as job creation and getting the right technology which has natural spinoffs in other sectors also. To promote the defence industrial base the Govt attitude has to change, to share work with Private sector as well. The fear of private sector on crowding out of India's domestic industry were unfounded as there is enough space for growth of both the domestic enterprises and foreign wholly owned subsidiaries.

            FDI limit for the defence sector has also been made applicable to manufacturing of Small Arms and Ammunitions covered under Arms Act 1959. It is a fact that the Defence Service and the Paramilitary Forces have a mixed inventory of Small Arms and Ammunition, which adds to logistic nightmare. Still, issuance of licence to domestic manufacturers to manufacture Small Arms and Ammunition remains an issue to be resolved first before any benefits of increasing the FDI cap can be taken.

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