“A nation with a strong defence
industry will not only be more secure, it will also reap rich economic benefits
– it can boost investment, expand manufacturing, support enterprise, raise the
technology level and increase economic growth in the country”.
— Hon’ble PM Narendra Modi at the
Aero-India Show (2015)
Abstract
In the past few years, the prime
objective of the government has been to make India a hub of manufacturing and
global investments, to boost local production and deploy young talented
population to lead the charge on indigenisation in the Defence Sector. The
‘Make in India’ mission has gained momentum to the extent that it is now
embedded in the very hearts and minds of the population. The campaign aimed to
“facilitate investment, foster innovation, enhance skill development, protect
intellectual property and build best in class manufacturing infrastructure”.1 This article highlights the
changes in Foreign Direct Investment (FDI) in the defence sector, how it is
reshaping India’s Military Industrial Complex and the positive framework for
foreign investors to invest in India.
Introduction
The government is trying to lead the defence manufacturing sector for ‘Make in India’ while the
second largest armed force is going through a technological transfiguration. The
government has identified sets of areas where stakeholders can collaborate and
solidify the vision under the ‘Make in India’ scheme, duly supported by a
requisite research and development ecosystem. India is the third largest
military importer with a defence spending of 2.15 per cent of the total GDP,
and intends to spend a hefty $ 130 billion on modernisation for all three
Services. Accordingly, the government has trotted out a variety of reforms and
rejigged procedures to support the domestic defence industry- domestic capital
procurement share has been enhanced from 64 per cent to 68 per cent of the Capital Acquisition Budget
of the Defence Services for the FY 2022-23; delicensing and digitising of
procedures; import embargo on procurement of weapons that can be made by
domestic industry; increased Foreign Direct Investment (FDI) limits to 76 per
cent through the automatic route and, in some cases, upto 100 per cent after
government clearance. It is centred on the following four pillars:
n New Processes
n New Infrastructure
n New Sector
n New Mindset
“A report by the International Monetary Fund (IMF) has pegged India to be a bright spot in an increasingly gregarious global environment and in a better position to deal with global headwinds than many other countries, as per the World Bank”.2 India has shown in the past three years its resilience to adverse situations and the numbers speak for themselves, India has been setting new records in terms of its FDI holdings.3
Liberalisation
and the Scope for FDI
It
was only in the year 2001 that the country opened up FDI in defence sector.
Initially, the cap was put at 26 per cent in equity holding of joint
ventures. Since defence is one of the
most critical aspects of National Security, it was the forte of Ordinance
Factories Board (OFB) and Defence Public Sector Undertakings (DPSUs). The
private sector was not allowed to manufacture equipment and had a very limited
role in some basic supplies to the armed forces. In 2001, private industry was
permitted to manufacture and was issued industrial licenses, but the primary
concern of decision-makers was in letting them in the ‘top-drawer’. Therefore,
when the FDI was initially opened up, certain practices were induced to make
sure that the Indians have control of the joint ventures/strategic partnerships
for instance, higher Indian representation in the management/board could
qualify the foreign company’s candidature. India had been dependent on foreign
technology/equipment/weapons for a long time and continued to falter in
building a robust policy base that would promote its local manufacturing, e.g.,
despite its offset policy of 2005, the first case of offset agreement happened
two years later. As policies evolved and liberalisation brought its touch, FDI
policies transformed to inculcate diversity of the investors and, hence, in
2013, the government allowed for 26 per cent access in the equity shares on a
case-to-case basis, only if they offered access to cutting-edge technology.
FDI
in Defence and Transfer of Technology (ToT)
The
concept of FDI inflow in an economy does not necessarily correlate to having
funds only but being also able to cash on the latest technological innovation
in any field. It is not merely the exchange of know-how but it acquires a purposeful
association between the domestic and global entity. This also builds a pattern
of cyclic relation wherein, the domestic manufacturers improve their techniques
with the latest technology and, in the process, eventually attract more global
partners, hence, if we look at the defence industrial base in India through the
lens of FDI, perhaps the decision makers will be able to understand the need
for higher FDI inflow.4 Moreover, FDI in defence becomes
even more necessary in today’s complex environment because:
n Technology is changing at an
unprecedented rate, hence, the defence sector is more susceptible to
obsolescence. This requires the decision-makers to carefully assess which
technology will be applicable in the Indian scenario without delaying the
acquisition and the timelines of a said project.
n One of the many problems associated with
defence manufacturing is the complexity of the defence systems and because of
the intricacies involved in the process, it makes it even harder to procure it
from a single vendor. In addition, there are technological agreements/regimes
that limit these mergers/acquisitions keeping in mind the volatility of the
geo-political environment. Therefore, to combine the
systems/sub-systems/components, together we need ‘system integrators’. This
requires the government to bond with multiple global partners and accentuate
the FDI framework to extract maximum benefits with suitable rewards for the
foreign vendors too.
n Since the relationship between the
countries is largely determined by the incentives or advantages that the
alliance may provide, it is also exacerbated by the volatility of the global
market. Foreign policy also plays a huge part in the entire dynamics as it will
advance the nation’s national interest by forging alliances with like-minded
partners to provide opportunities to find common avenues for growth and look
out for its domestic industries.
n Another predicament in the concept of FDI
is strict regulations surrounding the definition of representation of a foreign
entity. For instance, there has to be a majority in terms of Indian
representation in the board of management of foreign firm, a necessity of an
Indian company in partnership in order to qualify for FDI. In order to get
access to any kind of technology, the Foreign Original Equipment Manufacturers
(FOEMs) would want some kind of assurance of production of system/equipment at
a large commercial scale and to become part of the decision-making.
FDI is the largest source of a non-debt
financial resource for the economic development of the country. FDI is an
important component of foreign capital as they create long-term sustainable
capital, technology transfer, gives impetus to innovation and competition,
assists in furthering the development of strategic sector, and, primarily, a
huge source of employment. The current policy framework, is incorporated in a
Circular for a consolidated FDI Policy 20205,
lays down the following conditions:
n FDI up to 74 per cent under automatic
route shall be permitted for companies seeking new industrial licenses.
n Infusion of fresh foreign investment up
to 49 per cent, in a company not seeking industrial license or which already
has government approval for FDI in defence, shall require mandatory submission
of a declaration with the Ministry of Defence (MoD) in case change in
equity/shareholding pattern or transfer of stake by existing investor to new
foreign investor for FDI up to 49 per cent, within 30 days of such change.
Proposal for raising FDI beyond 49 per cent from such companies will require
government approval.
n Licence applications will be considered
by the Department for Promotion of Industry and Internal Trade (DPIIT),
Ministry of Commerce and Industry, in consultation with MoD and Ministry of
External Affairs (MEA).
n Foreign investment in the sector is
subject to security clearance by the Ministry of Home Affairs (MHA) and as per
guidelines of the MoD.
n Investee company should be structured to
be self-sufficient in the areas of product design and development. The
Investee/Joint Venture (JV) company, along with the manufacturing facility,
should also have maintenance and life cycle support facility of the product
being manufactured in India.
n Foreign investments in the defence sector
shall be subject to scrutiny on grounds of national security and government
reserves the right to review any foreign investment in the defence sector that
affects or may affect national security.
Standing
Committee Report on the Status of FDI (2021-2022)6
Responding
to a query in the Parliament on the number of foreign companies who have shown
interest in manufacturing defence equipment under FDI in the country, the
Minister of State for Defence, Shri Ajay Bhatt said, “The government has given
approval to 45 companies/JVs operating in defence sector with FOEMs”.7
The three armed Services are now
focusing on buying from domestic defence players, whether private or public
sector. These higher percentages can be attributed to the multiple reforms
being initiated to strengthen our defence sector; higher multipliers in the
offset policy, periodic consultations with FOEMs, defence corridors, defence
investors cell etc. The Committee has also lauded the MoD in this regard, “Committee
appreciates the efforts of the Ministry in this direction by bringing down the
imports of defence equipments which is a step towards the goal of Self Reliance
and Make in India”.8
The Committee noted that during the
financial years (2017-18 to 2020-21), out of total 239 contracts, 87 contracts
worth about Rs. 1,18,111.98 crore have been signed with foreign vendors
including USA, Russia, Israel, France, etc. for procurement of defence
equipment for thearmed forces.9
Defence
Spending and its impact on Strategic Choices
Although,
strategic competition and conflict shape a nation’s choices to deter an
adversary, it also provides a platform to demonstrate the technology and
manufacturing capabilities of a nation. Indian defence manufacturer, Kalyani
Strategic Systems Limited (KSSL) obtained an export order for its 155mm
artillery gun platform.10 The order worth $ 155.5 million will be
completed within three years. The 155mm artillery gun is capable of firing NATO
standard shells. Previously, Armenia had also purchased four batteries of the
Pinaka Rocket Artillery systems, including ammunition associated with the
product. The commitment also involved the purchase of Konkurs Anti Tank Guided
Missiles (ATGMs) manufactured by Bharat Dynamics Limited (BDL), and multiple
range of ammunitions (mortar shells) as part of their replenishment of Armenian
inventory. Armenia had also placed an order for the purchase of Swathi weapon
locating radars which are manufactured by Defence Research and Development
Organisation (DRDO) and Bharat Electronics Limited (BEL). As Armenia restocks
its land force after the conflict in the Nogorno-Karabakh Region, it has also
shown interest in purchasing BDL Akash Surface-to-Air Missiles (SAM), loitering
munitions by Tata Advanced Systems Limited (TASL), and Economic Explosives
Limited (EEL)11
It seems now that FDI and export of
defence systems are picking up in tandem.The Indian Government has been
constantly putting in the fore-front its intention to make India an export
powerhouse. Its ambitious $5 billion worth of exports will progress through the
trust that India has garnered over the years because of its ability to
transform and its respect across the globe for
a variety of reasons. Some of these are:
n Malaysia has shortlisted the Tejas light
fighter jet for an order of around 16 planes, and Argentina, Egypt and Botswana
have also expressed interest, Hindustan Aeronautics Limited (HAL) Chairman and
Managing Director CB Ananthakrishnan told reporters at a conference during Aero
India, the country’s biggest aviation event.12
n HAL has completed the delivery of an
Advanced Light Helicopter (ALH) Mk-III and other deliverables to Mauritius as
part of a C 141
crore defence deal.13
n In a recent move, the Guyana has shown
interest in the purchase of indigenously
produced equipment, Dornier 228 and fast patrol vessels, Hindustan Turbo
Trainer-40 (HTT-40), Light Utility Helicopters (LUH) and Light Combat
Helicopters (LCH).14 The Guyanese President had
separate bilateral talks with Prime Minister Modi on the sidelines of the
‘Pravasi Bhartiya Divas’. Exports to Guyana can be a game changer for India not
only in the defence sector but also Guyana is now emerging as an ‘oil Power’
with 11 billion barrels of reserves, it can be one of the answers to our energy
needs as we transit amidst the war in Europe.
Sale of BrahMos to other countries not
only pushes India’s exports but also holds promise of strategic partnerships.
Vietnam won’t be the first country to buy BrahMos. Last year, India inked an
export deal with the Philippines, signing a $375 million contract for the
BrahMos shore-based anti-ship missile system. Now Indonesia is also interested
in BrahMos.15
Recommendations
for adopting Smart Manufacturing in the
Defence Sector
These
recommendations are as enumerated below:
n India is a potential hub with its large
demographic dividend in terms of availability of a large technologically laced
labour, tech graduates, and low cost manufacturing. The government is already
readying itself with a roadmap for building India into a hub for innovation with
a growing startup community. Schemes and incentives for industry and global
manufacturers need to support the industrial bodies to accelerate this vision.
n Creationof a dedicated wing under the
Ministry of Commerce and Industry and the MoD for the adoption of Industrial
Revolution Four (IR4), that will monitor the global changes and standards.
n Defence industry to re-evaluate its
managerial roles, invest in developing skills for its employees in leadership
roles as well, targeting soft skills like- critical thinking, creativity,
emotional intelligence, judgement, and cognitive flexibility.
n Revitalising curriculums. Academia will
have to align their learning to the needs of the industries, with a heavy
emphasis on practical knowledge. Learners would need to unlearn and push
themselves to develop original research. Vocational training is to be given
importance to partner with industry. In the near future, the technological
needs of the defence forces will provide abundant opportunities to the domestic
defence industry and government run manufacturing units.12 Other favorable avenues for domestic production
include the following:
o Needs of
the mechanised forces that operate with Main Battle Tanks (MBTs) and Infantry
Combat Vehicles (ICVs), and Light Armoured Vehicles (LAVs). Although the T-90
Tanks are in wide use, yet their assembly and production have to reach the
optimum level of indigenisation.
o Similarly,
the Bofors gun (155mm medium) breathed its last and needs to be replaced with
advanced systems and indigenously produced gun systems with a quantum jump in
technology.
o Unmanned
Aerial Vehicles ( UAVs) are the future and would be required for providing an
‘improved’ level of battlefield transparency since our air defence systems are
still being dominated by the use of old-generation technology.
o Combat
engineers desperately need advanced bridging equipment, mines, minelaying and
breaching equipment, armoured vehicle engineers, loaded with multiple
capabilities, demolition guns, and self-neutralising attack mines on an urgent
basis.
o Non-Lethal
Weapons that can be used to disable military technology in urbanised terrain,
stun grenades, and optical and acoustic weapons.
o Artificial
intelligence (AI) to build target identification and classification, image
interpretation, and maintenance of sensitive weapon systems.
Conclusion
It
can be concluded that in order to build a holistic defence industrial base and
proactive manufacturing defence sector, it is essential firstly to implement
the Defence Production and Export Promotion Policy (DPEPP) 2020, which is till
date in a draft stage. Second, specific Production Linked Incentive (PLI)
schemes and incentive clauses for Disruptive technologies, Cyber Security, AI,
Semiconductors etc will attract greater FDI inflows and also become part of the
national security ecosystem. Third, Smart Manufacturing also needs to be
brought in early with foreign collaboration to ensure highquality reliable
manufacturing of defence equipment under field conditions. As we work our way
through an era of uncertainty and volatility in the geo-political environment
which determines the relationship with allies, let us find the right partners
to bring in their investment in our strategic defence sector in the following
specific areas of niche technology, which is the need of the hour for India if
it is aspiring to be a global power:
n Gas Turbine Engines
n Hypersonic Missiles
n Ballistic and Cruise Missiles
n Submarines
n Fifth Generation Fighters
n Transport Aircrafts to meet military
requirements
n Secure communication devices, secure
microprocessors and secure routers
n Cyber Security Infrastructure
n Surveillance Systems
Endnotes
1 https://www.pmindia.gov.in/en/major_initiatives/make-in-india/
2 January 16,2023
published in the Money Control News https://www.moneycontrol.com/news/business/davos-2023-pli-gst-like-reforms-to-help-india-remain-a-bright-spot-says-niti-aayogs-param-iyer-9872871.html
3 https://www.youtube.com/watch?v=45PrXujlQCo&ab_channel=Uday
Kuckian
4 Maj Gen Mrinal Suman, Indian Defence Review
(01 January, 2007)
http://www.indiandefencereview.com/news/fdi-in-defence-industry/
5 https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf
6 The Standing Committee on Defence (2021-22)
Seventeenth Lok Sabha, Ministry of Defence, Demands for Grants (2022-23)
Twenty-Eighth Report
https://eparlib.nic.in/bitstream/ 123456789/800867/1/17_Defence_21.pdf
7 The Economic Times Mar 24, 2023, 04:24 PM IST
https://economictimes.
indiatimes.com/news/defence/govt-approval-to-45-companies/jvs-operating-in-defence-sector-with-foreignoems/articleshow/98969574.cms?
utm_source= contentofinterest&utm_medium=text&utm_ campaign=cppst
8 The Standing Committee on Defence (2021-22)
Seventeenth Lok Sabha, Ministry of Defence, Demands for Grants (2022-23)
Twenty-Eighth Report
9 https://loksabhadocs.nic.in/lsscommittee/Defence/17_Defence_33.pdf
10 Adithya, 11 November 2022 in the Overt Defense
https://www. overtdefense.com/2022/11/11/indian-firm-kalyani-wins-export-order-from-armenia-for-155mm-artillery/
11 https://www.overtdefense.com/2022/11/11/indian-firm-kalyani-wins-export-order-from-armenia-for-155mm-artillery/
12 https://www.reuters.com/business/aerospace-defense/indias-hal-talks-with-four-countries-export-tejasfighterjets20230214/#:~:text=Malaysia%
20has%20shortlisted%20the%20Tejas,the%20country’s%20biggest%20
aviation%20event.
13 https://newindian.in/hal-exports-advanced-light-helicopter-mk-iii-to-mauritus/
14 Asha Nagendra,
Pawan Anand -Technology Needs of The Indian Army: Business Environment &
Opportunity, International Journal of Research in Economics and Social Sciences
(IJRESS) Available online at:http://euroasiapub.org Vol. 7 Issue 12, December- 2017, Special
Issue, pp. 82~93 ISSN(o): 2249-7382 | Impact Factor: 6.939
15 https://economictimes.indiatimes.com/news/defence/the-business-of-brahmos-how-indias-defence-exports-blasted-off/articleshow/100961603.
cms
@Dr Sanjay Kumar is a professor in the Department of Defence Studies, Meerut College, Meerut. He is also a Visiting Professor at the USI of India, New Delhi.
#Group Captain (Dr) Rajesh Kumar Singh (Retd) is a Senior Research Fellow at the Indian Council of Social Science Research, New Delhi. He is also a Visiting Fellow at the USI of India, New Delhi.
Journal of the United Service Institution of India, Vol. CLIII, No. 632, April-June 2023.