On March 24, 2017, while responding to a question in Parliament,
the Minister of State for Defence informed us that the FDI equity
inflow for April 2013-December 2016 in the defence sector was 1
million USD. As expected, this response elicited dismay from the
national media, which covered this story alluding to policy
failures of the current regime.
Ever since the current government took over at the Centre, it
has consistently touted the Defence Sector as a special focus area.
From Make in India to modernisation plans worth billions
of dollars, the Defence sector has consistently occupied pride of
place. The much publicised reform brought by Press Note 12 of 2015,
which permitted foreign investment up to 49% under automatic route
and up to 100% under government approval route in the Defence
sector, was one such bold move by the government, which truly
reflected what the industry had been asking for many years.
However, even after nearly 3 years of the current Government
being in power and more than one year after liberalisation of FDI
in Defence, the investment numbers remain dismal. In attributing a
justification for this lack lustre performance, while a lot has
been said about uniqueness of the Defence sector including
technology restricting regimes and reluctance of foreign companies
to transfer high end technology without having control of the joint
venture company, the most crucial aspect has been overlooked by
most: 'FDI in Defence' represents only such
foreign investment which falls under para 5.2.6 (Defence Industry
and small arms and ammunition) of the Consolidated FDI Policy.
By way of Press Note 3 of 2014, the current Government brought
about the much needed clarity on what constitutes
"Defence" under para 5.2.6 and in effect drastically
reduced the items which were hitherto considered to be
"Defence". Importantly, items, parts, components,
castings, forgings and tests equipment (unless specifically listed)
were excluded and the definition of "Defence".
As such, "FDI in Defence" now only meant FDI in an entity
that manufactures only complete equipment such as tanks, armoured
vehicles, aircraft, warships and arms and ammunition, not a company
that manufactures parts or components of such equipment. Therefore,
though investment in manufacture of military aircraft in its
entirety would be included under "Defence" but
manufacture of all its parts separately will not.
Much like most other manufacturing industries, well before
manufacture of complete products or integration of complexed
systems, units manufacturing parts and components have to be
established. The Indian market is also seeing this happen in a big
way and a significant amount of foreign investment has already come
in for manufacture of parts and components of defence equipment,
especially of fighter jets, helicopters and allied products..
However, these FDI inflows are counted under the general
"Manufacturing" head and not under the defence head, as
after the introduction of Press Note 3 they do not attract the
provisions of para 5.2.6 of the Consolidated FDI Policy and do not
require an industrial license.
Investment in the manufacture of significant parts and
components of purely defence equipment certainly contributes to
defence industrial infrastructure and is probably the first
concrete step in establishing self-sufficient defence manufacturing
eco-system in India in the private sector. In this backdrop,
it would make sense to abstain from placing undue reliance on FDI
statistics in the defence sector. The defence manufacturing sector
is well on its way in India, even though FDI numbers suggest
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