The key is technology, not money

If self-reliance in defence is the stated goal, FDI is no solution. India must apply the same tools it did so successfully in space and nuclear science to acquire and develop military technology.

India’s notorious dependence on imported military hardware and the near moribund state of large parts of its public sector defence industry represent a full-blown crisis crying for a solution. India is the world’s largest arms importer and, with at least two decades of not replacing or upgrading obsolescent equipment through either purchases or indigenous manufacture, is on course now to spend around $30 billion in the next few years, and $200 billion in the medium term. For some years now, from the Atal Bihari Vajpayee-led National Democratic Alliance government in 2001 onwards, the government has been veering towards increased foreign direct investment (FDI) in defence manufacturing as a solution to the defence crisis.

The present Bharatiya Janata Party government, despite its rallying ‘Make in India’ cry, has furtherincreased the FDI limit in defence, with 49 per cent now permitted under the automatic route, 75 per cent where technology transfer is involved, and up to 100 per cent in cases involving significant new technology. While some Indian companies are wary of the entry of foreign players, most favour opening up the sector with an eye to the potentially lucrative business opportunities they see opening up.

For and against FDI

The arguments in favour of FDI in defence are familiar. First, public sector companies in defence, Research and Development and allied industries have consistently failed to meet the requirements of the armed forces, especially given the global revolution in military technology. Second, the superior management culture of the private sector will ensure better adherence to budgets and timelines. Third, the country is compelled into repeated imports without any technology transfer (despite contractual obligations) because the military is always urgently in need of the technology. Therefore, the argument goes, encouraging foreign companies to invest in Indian defence and set up industries here will mean that money will be spent within the country, generating jobs and bringing in new know-how, with the possibility of exports.

“ All the liberalised provisions since 2001 have led to a meagre inflow of only $4.8 billion, in an overall FDI inflow of around $334 billion.”

In my opinion, none of these arguments address the specific and unique needs of the defence sector in India. Whatever else these measures might achieve, they will not help accomplish what must surely be the main goal, namely to build self-reliance in advanced military technology and reduce India’s debilitating dependence on foreign suppliers in the area of national security.

The FDI inflow itself tells a tale. All the liberalised provisions since 2001 have led to a meagre inflow of only $4.8 billion, in an overall FDI inflow of around $334 billion. It may be argued that it is too early to judge, but there are actually good reasons why defence companies do not and will not find FDI in another country attractive, and why there are few such examples across the world.

FDI means a long-term presence in India, and good returns on investment are possible only if repeat orders or contracts for newer models are assured. But, unlike cars or white goods, that will not always happen in military equipment. There may be gaps of many years or even decades between orders. For instance, India bought the Mirage 2000 in the 1980s and has clinched the Rafale deal this year, both from Dassault of France. In France itself, however, Dassault is reasonably assured of continuous business from regular domestic and European orders, as well as from staggered exports. Foreign subsidiaries or substantial FDI will, thus, always put pressure on India for repeat orders. Would dependence on a Lockheed Martin (India) or a Bharat Boeing be really very different from dependence on the U.S. principals?

Yes, more of India’s money will be spent in India rather than in other countries. But the Defence Procurement Policy anyway mandates 30 per cent offsets (50 per cent in high-value contracts). In other words, the supplier must spend 30 per cent of the contracted value within India through local manufacture and services. On the other hand, even if manufacture were by an Indian subsidiary, some specialised technology or components will always need to be imported. As is the case in car manufacture by Korean or Japanese subsidiaries in India, where numerous models that sell in smaller volumes are only assembled in India with imported components. FDI may, therefore, not be so different from offsets in terms of local manufacture, jobs, or money spent.

Where is the technology?

It is often simplistically assumed, unfortunately by policymakers too, that FDI will bring in technology. Nothing could be farther from the truth. All foreign defence majors have protested continually against offsets, and have pressured India into diluting offset requirements one way or another. While they might cite logistical or other issues, the real anxiety is about sharing and losing control over technology, especially if the offset partner in India is a public company whose bargaining power would be greater than that of a private sector junior partner. The delay over finalising the Rafale deal was reportedly over disputes about the role of Hindustan Aeronautics Ltd.

“ It is often simplistically assumed, unfortunately by policymakers too, that FDI will bring in technology.”

India’s confidence in FDI draws a facile equation between foreign investment, local manufacturing and technology inflow. The key, however, is not money but technology. Technology transfer is elusive. It requires not just a clause in a contract, but in the recipient taking determined measures to ensure acquisition and absorption of technology. India has been singularly poor at that, some conspiracy theorists say, deliberately so. Further, domestic manufacturing has not in itself enabled it either. India has a long history of licensed manufacture of defence hardware, from the heydays of the self-reliance credo, the import substitution drives, and the famous “be Indian, buy Indian” slogan. In aircraft, for example, the famous Gnat fighter, the MiG series, the Jaguar, and various French helicopters were made here. In each case, the degree of indigenisation kept rising, sometimes reaching 90 per cent by value, but critical components or materials continued to be imported. India never achieved the stated goal of acquiring the capability to make the next upgrade or new model on its own. True indigenisation cannot happen just through local manufacture, India has to make it happen, but has not yet done so.

The present offsets policy is similarly not being used purposefully to acquire technology. Offsets are viewed in financial terms — money spent locally and jobs created. Instead, offset projects should be studied strategically — Indian scientists and companies acquiring the capability to independently develop and manufacture sophisticated military hardware. To rephrase, the goal should be ‘Made by India’, not merely ‘Make in India’. This is true for all technology, but crucial in defence. India has done it in space and nuclear technology. Why not in defence?

FDI in defence is an incorrect answer to wrong questions, a false solution to problems not posed properly. If self-reliance can be achieved in the strategic fields of space and nuclear technology, through dogged pursuit and by creating institutions of excellence with political support, there is no reason why it cannot be done in the equally strategic area of military hardware. India even has a Minister of State for Defence Production but nobody seems to know what the office is meant to do.

No self-respecting nation of India’s size and technological capability can or should accept dependence on foreign manufacturers for defence requirements, whether directly through imports or indirectly through FDI. This is not just about national prestige but a matter of vital national interest.