Of defence and FDI

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PERISCOPEBRAHMNew Delhi, August 8, 2013: Though the UPA has provided a big push for Foreign Direct Investment (FDI) in defence by allowing higher than 26 per cent on a case-to-case basis for state-of-the-art technology (to be decided by the Prime Minister-led Cabinet Committee on Security), defence experts feel there is still ambiguity on how to clearly define such technology.

In favour of a comprehensive policy for relaxation of the FDI cap for the sake of transparency, rather than the decision being taken on a case-to-case basis, a former Defence Ministry bureaucrat said if the past experience was any guide, it was unlikely to happen, primarily because of lack of clarity on the policy front. “For example, would the Ministry of Defence be willing to relax the FDI cap if the foreign vendor wants to set up a wholly owned subsidiary for absorbing the technology? Many such issues are likely to come up,” said Amit Cowshish in a paper titled ‘FDI in Defence’, presented recently at the Institute for Defence Studies and Analyses (IDSA).

Pointing out that India has become the largest importer of defence wares, Mr. Cowshish said it suggests that either the industry does not have the financial capacity to invest in research, design and development or it has the capital but it is unwilling to invest because of some other reasons. He said there have not been many indigenous breakthroughs in research, design, and development of new equipment and weapon systems.

“In the short run, dependence on joint ventures set up in India with FDI that is higher than the existing limit of 26 per cent cannot be more harmful and risky than dependence on imports. If nothing else, it will save precious foreign exchange. If higher limits of FDI in other fields have not stymied the growth of indigenous industry in those areas, it is unlikely that the impact of increasing the FDI cap would be very different for the defence industry,” he argued.

Former Scientific Advisor to the Defence Minister, who recently retired as chief of the Defence Research and Development Organisation (DRDO), Dr. V.K. Saraswat, said there was a wide gap of about 20 years in many critical defence technologies between India and the developed nations. “There are many modern technologies to which we have no access. These include lasers, high-end computers, sensors, very special materials, composites, seekers, chips, futuristic radars and future defence systems. The list is very long,” Dr. Saraswat told The Hindu.

Though he favoured FDI of 49 per cent in defence and found it a “good solution”, he preferred the setting up of an expert group of scientists who could identify and determine as to what was “critical technology” rather than leaving the area to bureaucrats.

Pointing out that India has lacked the culture of design, research and development of technologies over the past 60 years, Dr Saraswat said that only three government-owned premier organisations — DRDO, Department of Atomic Energy and ISRO — were involved in such activities. “Others like the Council of Scientific and Industrial Research and the Science and Technology Department were not wholly devoted to the defence sector,” he said.

Citing example of Brahmos, the joint venture with Russia to produce missiles, Dr. Saraswat said that India had not got access to cruise missile technology or seekers. “We have assembled products or done licensed production. A foreign vendor will invest here only when it is assured of getting good returns.”

Another former defence official felt there has been a lack of parameters for export-oriented trade for the Indian defence sector. He said the case-by-case approach of the Defence Ministry has led to a prolonged and lack of a standardised decision-making process. He said the Ministry must encourage joint ventures as a way forward as it would ultimately lead to transfer of technology and indigenisation.

On areas of modern technology which still elude India, a former Navy official cited examples of electro-magnetic aircraft launch system (EMALS), sensors, stealth technology, night vision devices, data-linked ground positioning system for future combat soldiers and remote-controlled intelligent undersea mines. “We need to have manufacturing culture and quality consciousness. FDI can get you funds but you have to build and widen your own technology base. Other way out is that private companies go for buying of foreign companies like Tata acquired Jaguar Land Rover and Corus,” he said.

In his July 1 letter to Union Commerce Minister Anand Sharma, Union Defence Minister A.K. Antony had said that the Ministry of Defence was actively encouraging the involvement of the private sector in defence.

“We are importing weapon systems for our immediate requirement, till we develop our own systems,” he said, adding that India did not want to perpetuate its dependence on foreign countries.

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