Originally Published 2014-07-08 08:50:39 Published on Jul 08, 2014
The issue of 100 per cent foreign direct investment in defence keeps getting muddied by the day, with various industry bodies such as the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry apparently flip-flopping on an hourly basis.
In defence of 100 per cent FDI
For some reason or the other, the issue of 100 per cent foreign direct investment in defence keeps getting muddied by the day, with various industry bodies such as the Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry apparently flip-flopping on an hourly basis.

To grasp this issue we need to understand three aspects of the defence trade — the nature of internal markets and export; the role of and impact on industry; and, possibly most important, the state of education in the country.

In terms of national security and indigenisation, this entire debate is moot, because no amount of FDI is going to fix the sorry state that 60-plus years of babudom have brought us. The reality today is our defence budget hovers around the $35 billion mark. Despite the brouhaha that is made about India being one of the biggest defence markets, let us put this figure in context.

The US, which has a $650 billion budget, exports less than three per cent of its value in defence products every year. The US does not depend on the lucrative export market to sustain its industry. Britain and France have a defence budget of around $60 billion each, around 1/10th of the US and exports account for between 15 and 20 per cent of the value added in defence products. Clearly exports are critical to them. Israel, which has a defence budget of around $15 billion to $20 billion, depends to the extent of about 45 per cent on exports to sustain the value added to its industry.

India has to hit the ground running with exports between 25 per cent and 40 per cent to make any indigenisation effort feasible. Anything else defies the laws of economics. Period. This is where 100 per cent FDI makes sense. It brings in foreign companies into a defence market that may be large, but is fundamentally unsustainable as a purely indigenous enterprise. Essentially this is a reality check on the flights of fancy we seem to have with regards to our so-called defence sector.

On the other hand, some of the harm to Indian industry can be quite real, but it can also be ameliorated. For example, despite the utter vicious and step-motherly way it has been treated (by the Government), Larsen and Toubro has sunk enormous amounts of its own money into developing cutting-edge technologies like air independent propulsion for conventional submarines. The entry of foreign AIP suppliers would obviously make L&T's entire investment in this sphere unviable. On the other hand, it is important that we understand that no original equipment manufacturer actually makes the entire system on its own.

At best it does the final assembly of between 30 per cent and 40 per cent. This presents the opportunity side, where the 100 per cent FDI law does not mean that the company will in fact be manufacturing and producing 100 per cent of the product. Rather a sub-clause in the law aimed at indigenous manufacturing of sub-components can be divided up amongst local industry. This would bring essential and new skills, processes and techniques to India as well as slowly expose our private sector defence firms to actually working in the international arms market.

Sadly, issues highlighted like the one with L&T investments in submarines are not addressed by any of these solutions. Propping up L&T will very much be a strategic decision which will have to be taken at the prime ministerial level. The questions will be two-fold: First, is this technology strategic enough that we must support an indigenous effort and sustain it even through its initially unprofitable phases, especially in the beginning when its performance will be sub-par? The second question that the PMO will have to decide in a much larger framework is how far can indigenous industry succeed when defence public sector units suck up valuable national resources with exactly zero results to show for? Essentially the Defence Research & Development Organisation, Hindustan Aeronautics Limited etc are India's white-collar version of failed social schemes like Mahatma Gandhi National Rural Employment Guarantee Act. The question is: How long can these be sustained, when our private sector has to stare down not just foreign competition but also complete non-performers like the DPSUs that are fundamentally incapable of bringing home the bacon and have actively stifled innovation and organic growth in the country?

Last, and perhaps most important, is the educational aspect of 100 per cent FDI in defence. The sad reality is that India's public or private sector reflect much of the damage that has been wreaked by our education system, that values learning by rote over-reason, and reproduction of over-analysis. There is a reason that fewer and fewer Indian institutions get listed among the top educational institutions of the world. Can anybody reading this column list a single major technological or scientific innovation by an Indian company in the last 25 years? Anything that changed the world? After all, CV Raman got his Nobel Prize for the study of crystals, and in spite of this supposed headstart we do not have enough theoretical or practical knowledge within the country to master crystal blade technology so critical to aircraft propulsion — military or civilian. This is not a problem that money or time can solve. Despite having far greater commercial successes, deeper pockets and a much deeper and analytical scientific base than India, both Russia and China have failed miserably in this very sphere of crystal blade manufacture.

Much of this has to do with the fact that what makes modern technology 'modern' is not the blueprints or designs, but rather the process. Western technological superiority is not based on designs it is based on process. To acquire these processes, we need to guarantee solid intellectual property protection. The way to ameliorate the concerns of the foreign defence MNCs and at the same time acquire these technologies, is to incorporate a sub-clause in the 100 per cent FDI law, that ensures 100 per cent Indian staffing of foreign companies, within say seven to 10 years of incorporation. This may somewhat ameliorate the ill-effects of the malignant Indian education system.

(The writer is a Programme Coordinator at Observer Research Foundation, Delhi)

Courtesy: The Pioneer

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