Don’t hike FDI in defence production; expand private sector involvement

Commerce minister Anand Sharma says the government will not rush to further open up defence production to foreign manufacturers. Caution is welcome in a sensitive sector like defence. His response comes after defence minister A K Antony opposed an increase in the FDI limit to 49% from 26%, saying it would stymie the growth of domestic industry. Antony has also argued that the country cannot afford to be dependent on foreign companies and governments on a long-term basis. These are valid points. The export control regulations of some countries could be iffy and supplies may cease or contracts cancelled due to external politics.

Today, India has the dubious distinction of being the world’s largest arms importer, but China is an arms exporter. This reflects our failure to develop an indigenous defence manufacturing base by engaging state-owned and private companies. China has reverse-engineered its way into the export market. The dependence on imported weapons is a drain on the exchequer, and will widen the balance-of-payments deficit. There are security risks too: weapons are increasingly reliant on IT hardware and software. Foreign suppliers could hand over the codes of weapons in India’s armoury to potential enemies. We need a strong domestic industry, not more imports or FDI. Defence production is dominated by PSUs, but their infrastructure is inadequate to meet the demand arising from offset clauses built into large purchases. The offset policy — wherein the foreign supplier has to spend 30% or more of the value of large orders in one of the listed ways, including local investment, technology transfer and procurement — will help build strong indigenous capacity. The private sector must play a bigger role to lower costs and raise efficiency in defence production.