Pros and Cons of FDI in the Defence Sector

By: Dhruv Malik Indian Institute of Mass Communication

(Advertising & Public Relations)

Pros of 49% FDI in Defence

• Reduce imports, improve country’s capacity to produce defense equipment locally

• Higher employment and training opportunities due to set up of more production plants in India

• Globally competitive equipment made

• Positive approach in terms of exporting the same equipment to other countries and utilizing this foreign technology for production of equipment for other companies

• No threats to internal security in a country which is prone to terrorism

• Intellectual property rights remain with India till it has a 51% share

• Better technological know-how of defense equipment production thus producing higher returns for the Indian companies

• Controlling rights of the Joint Venture in Indian hands as the Managing Director and the CEO will be of the Indian Company

• India is already burdened with the 74% cap in defence sector, so 49% FDI will ease the financial pressure, thus the capital saved can be utilized in other sector

Cons of 49% FDI

• Low enthusiasm of the foreign players as they do not have the controlling stake and hence do not  have the incentives to bring modern technology into India

• The 49% cap still does not alleviate the concerns about loss of Intellectual Property rights

• India may still remain the largest defense equipment importer if the technological know-how is not increased (approx. INR 40,000 crores in 2013)

• Equipment manufactured domestically still have majority parts imported from foreign countries

• India despite being the largest importer of defense equipment in the world has its manufacturing capacities at a nascent stage

Tools Suggested to Overcome the Problems Due to FDI:

• Guidelines of the Department of Industrial Policy and Promotion should be followed; 74% FDI in case of technology transfer and 100% in state of the art technology in a case to case manner- Lobbying to get more foreign companies to invest in India

• Taking inspiration from DRDO and ISRO in India and the technological advancements they have done in making the mission to Mars successful and the Agni 1 and Agni 2 and the very famous Brahmos via in house research

• The international companies that have advanced technologies should collaborate with Indian companies to form Joint Ventures for Research and Development in India, to make products suitable for all markets thus resulting in benefit for India as well as royalty for the international companies

•  Lobbying to get the government and international companies to agree on a Joint Venture for Research and Development in the Defense Sector

• Lobbying to get OEMs(Original Equipment Manufacturers) to come into India and further get their suppliers to set up JVs with Indian companies, through this the Indian companies will benefit as they now become a part of the supply chain

• Formation of a joint force committee with all the Indian manufactures coming together to put pressure on the government