FDI is a short form of Foreign Direct Investment. As the name suggests, is a form of investment made in India by a foreign entity. It can be an MNC, or a Foreign Government itself!
Nowadays a lot of debate is going on FDI in Defense. The Modi government's move to increase FDI limit to 100% in Defense was the seed to this contentious debate.
All these used to be prominent brand names when we grew up. As the Indian economy opened up only post 1991 LPG regime, ( Not LPG gas; it's Liberalization, Privatization, and Globalization) , it didn't open up fully for FDI. Thus foreign investors(companies) had to collaborate with Indian Cos. Thus these brand names came into existence.
Before going any further, I would first show you a glimpse of the Indian Defense sector.
India has the 3rd largest army after China & USA( in terms of serving personnel). However only Army doesn't give the indication of the military strength of a country. So how do we calculate which Military is the strongest?
A terms called as Global Fire Power(GFP) was devised to gauge the Military strength of nations based on conventional warfare capabilities over Land, Air, and Water. In doesn't include Nuclear Weapons. Here is the GPF ranking:
Now that seems to a respectable position for India. However, it also creates a problem for us. As everyone may have known, we Indians are not doing very well in indigenous arms manufacturing. India is heavily dependent upon imports to maintain its arsenal.
To give you a perspective, I must tell you, India is the BIGGEST Arms IMPORTER of the world. We only meet 30% of our military hardware requirements in-house , thus the imports. We are mainly dependent upon Russia for conventional arms. For other state-of-the-art technologies we have now started dealing with countries like France, Israel, USA, Britain etc.
We must also note the despite having a big size the military arsenal of India is in dire need of modernization. Our military arsenal is ageing quickly. Defense deals takes years to realise and that adds to the our misery. Remember the Khatara MIG-26 crashing every now and then!
These are the biggest exporters of the world as of 2012
Such heavy dependence lends a clear strategic disadvantage to our nation. Just imagine that we are expecting a war, and our exporter forced by some other world power deliberately delays the supply/repair work, or worse cancel the contract unilaterally.
Given the kind of neighbors we have, and the times we live in, it is of utter importance for India to become self reliant. Agreed that it can't happen over night , but the process should begin now.
We now know that FDI is a form of foreign investment. Now this investment can be done by investing into an existing company, or creating a new entity all together. When someone invests in a company, he is in a way buying a stake in the company. So if you buy half the shares of the company, we will call it is 50% FDI. By similar logic, a new entity created by FDI would mean 100% FDI i.e. in full control of the foreign investor.
Strategical Advantage
Nowadays a lot of debate is going on FDI in Defense. The Modi government's move to increase FDI limit to 100% in Defense was the seed to this contentious debate.
Is FDI is new phenomenon?
Certainly not. We have been witnessing FDI since a long time. Do you remember Lehar-Pepsi, Campa-Cola?? No?? Well, then you certainly can't forget these: Maruti-Suzuki, Hero-Honda, Kawasaki-Bajaj et al.
All these used to be prominent brand names when we grew up. As the Indian economy opened up only post 1991 LPG regime, ( Not LPG gas; it's Liberalization, Privatization, and Globalization) , it didn't open up fully for FDI. Thus foreign investors(companies) had to collaborate with Indian Cos. Thus these brand names came into existence.
Before going any further, I would first show you a glimpse of the Indian Defense sector.
How Strong is Indian Army?
A terms called as Global Fire Power(GFP) was devised to gauge the Military strength of nations based on conventional warfare capabilities over Land, Air, and Water. In doesn't include Nuclear Weapons. Here is the GPF ranking:
*I know what are you searching :). Pakistan is ranked 16th!
Now that seems to a respectable position for India. However, it also creates a problem for us. As everyone may have known, we Indians are not doing very well in indigenous arms manufacturing. India is heavily dependent upon imports to maintain its arsenal.
India- The Biggest Arms Importer!
Every month you may have noticed a headline in newspaper mentioning a heavy defense deal with XYZ country for Fighter jets, Aircraft carriers, Tanks, Arms, and other advanced systems.We must also note the despite having a big size the military arsenal of India is in dire need of modernization. Our military arsenal is ageing quickly. Defense deals takes years to realise and that adds to the our misery. Remember the Khatara MIG-26 crashing every now and then!
What about the Missiles??
You must be wondering that how come we manufacture our own missiles and import other arms and military hardware. Well, say thanks to ISRO( Indian Space Research Organization). It is because of our advancement in Space Technology that we are able to replicate the same in Defense (Read Missile) technology. Thus we are the proud owner of long range missiles like Agni, Brahmos, Aakash etc.
Also we have manufactured Nuclear Submarines, again thanks to the Nuclear Program of India. Afterall we are a Nuclear Power i.e. one of the 8 countries which have Nuclear Bombs.
In other departments we are lacking. The Indian manufactured Light Combact Aircraft 'Tejas' took over 30 years to get completed. It got started in 1980s and just got inducted in Indian Army.
What is the problem with Importing?
You should be asking this question, that what is the harm? After all we import so many things from abroad starting from Oil to needles. Well, there is a problem. It may not seem obvious but there is. The two main implications are listed below:
1. Financial Impact
Importing advanced warfare systems costs dearly to us. Defense expenditure forms a large part of our budget. The foreign countries are earning on expense of our tax payers, making full use of our inability to produce in-house quality defense systems and military hardware.These are the biggest exporters of the world as of 2012
1
|
USA
|
30%
|
2
|
Russia
|
26%
|
3
|
Germany
|
7%
|
4
|
France
|
6%
|
5
|
China
|
5%
|
2. Strategical Disadvantage
It is not just the drainage of money into imports. We are heavily dependent upon the OEM (Original Equipment Manufacturer) for repair, maintenance, and up-gradation of technology. This results in a perpetual recurring expenditure which is not adding any value to our defense resources yet costs us hefty.
Such heavy dependence lends a clear strategic disadvantage to our nation. Just imagine that we are expecting a war, and our exporter forced by some other world power deliberately delays the supply/repair work, or worse cancel the contract unilaterally.
Given the kind of neighbors we have, and the times we live in, it is of utter importance for India to become self reliant. Agreed that it can't happen over night , but the process should begin now.
FDI in Defence
So, what exactly FDI in Defense entails? What is this percentage all about?We now know that FDI is a form of foreign investment. Now this investment can be done by investing into an existing company, or creating a new entity all together. When someone invests in a company, he is in a way buying a stake in the company. So if you buy half the shares of the company, we will call it is 50% FDI. By similar logic, a new entity created by FDI would mean 100% FDI i.e. in full control of the foreign investor.
De-Facto Situation?
FDI does exist in Defense. It was decided that we need to augment manufacturing of military hardware in India, with target to meet 70% of our needs. The Vajpayee govt initaited FDI in 2001 and allowed for 26% FDI in Defense. It was subjected to approval from FIPB( Foreign Investment Promotion Board). Later UPA govt proposed to hike the FDI to 49%, subjected to following approvals.
26%
|
FIPB approval
|
26% plus
|
Cabinet Committee
on Security
|
FII
|
Not allowed
|
That time also demand was for 74%. Why not 100%? Well, many critiques feared that 100% would jeopardize the security of our nation by making us completely dependent of foreign entities for arms and military hardware.
However the Modi Sarkar has gone for 100% FDI. Why? Well, the current percentage was not yielding India any benefits i.e.
- Unable to help Indian manufactures to import state-of-the-Art technologies
- Effectively decreasing the Import budget of India
100% FDI would allow for more control and thus attract more and quality investment, thus benefiting India. Ironically it was BJP which opposed 49% FDI. Well, they were pretty much opposing everything at that time. How quickly we forget though!
But what are the benefits of FDI? Well, it varies for different sectors. Let's have a look wrt to Defense sector.
Benefits of FDI in Defense
Boost up Domestic Military Hardware Manufacturing
- FDI would ensure fresh investment. This will strengthen the existing industries. It will also allow for opening up of new manufacturing units dedicated to variety of military hardware. Foreign ownership would also ensure better manufacturing practices, thereby enhancing efficiency. A good revenue would ensure that the money goes into R&D for Indian defense requirement. This would all ensure that in-house manufacturing of much needed conventional and advanced military hardware becomes a reality.
Platform for Transfer of State-of-the-Art Technologies
The best technologies around the world would be introduced in India for mass scale manufacturing, thereby reducing our reliance on hefty, time and resource consuming exports.
Reduce Import Bills, Improve Economy
In-house manufacturing is bound to be cheaper than the imports from foreign nations. It will thus, in a long term, reduce the import bill. This would help reduce the burden of Current Account Deficit(CAD) and ease the Fiscal deficit, the two main indicators of a country's economic performance.
Employment and Skill Development
The new industries will need labour: skilled, semi skilled, and unskilled. This will provide for employment opportunities. Also induction of new technology will lead to skill development of our human resources. More the jobs, happier the people.
More Money for Social Service
The freed up govt resources and finances could be used for citizen friendly policies and schemes. The Budget would then focus of fighting the prevalent issues like Poverty, Education, improving healthcare, protecting environment et al, rather then waiting for delivery of military hardware. Like we did for INS Vikramaditya :P
Strategical Advantage
India would, in a long term, be able to achieve self reliance in terms of military hardware and could even start exporting to lesser developed countries. This would do away with dependence on OEM for repair and maintenance and provide us the much needed flexibility. If need be, we can even arrange for over-night ammunition. This a very significant strategical advantage.
Concerns, should there be any?
Yes, having concerns is a quite a rational argument. However there is a way of negating, if any. We can't just avoid FDI on the pretext of 'jeopardy of Nation Security'. Obviously it can't be compromised with, however concern alone can't stall ones progress.
Anyways, there can be measures like the product definition could be given by India. We allow FDI to only those who are bringing in state of the art technology. Cabinet Committee on Security could overlook the whole FDI process et al.
The point is, if USA and the European Union have 100% FDI in Defense. So why can't we?
Conclusion
We must know that China is the 2nd largest arm importer of the world. Does that make China weaker than us. NO!! China indeed is playing a strategic game. I say so because China is also the 5th Largest Arms exporter of the world. It's main customers are neighbors Pakistan, Srilanka, Bangladesh.China controls 5% of world arms exports. Now that is substantial.(refer the bar chart) China is strengthening its military and also arming our neighbors. Whereas we can't even supply the much needed weapons to Afghanistan.:P
Look the stats below:
Not a situation India would want. Thus given the complex nature of geopolitics, it is high time for us to strengthen our selves, remove the inertia, and become self reliant. We have already fought to Pakistan and China. Let's make ourselves so strong (not on the expense of our people) that peace prevails.
Remember, Strength is the biggest deterrence to War!!
So FDI in Defense is well worth the gamble ( in our very own Casino) :P
