The multinational arms companies would have loved to see India opening up the Indian defence sector for them without any strings attached. However, the Indian defence industry has widely welcomed the announcement made by the Defence Minister Arun Jaitley in his maiden budget speech, of raising the FDI limit up to 49 per cent in defence industry. The CII President Ajay Shriram has welcomed the raise in foreign direct investment (FDI) limit in defence while the FICCI President Siddhart Birla has said that the announcement to enhance the composite cap of foreign investment in defence sector will send a strong message to the global investor community.

However this falls far short of the expectations of the international arms companies who would like to manufacture their weapons systems , proposed to be sold to Indian armed forces, on Indian soil provided they are extended the protective policy umbrella. The President of the Federation of German industries Ulrich Grillo, who was in New Delhi only a day after the presentation of the budget, reacted cautiously to the raising of the FDI limit in defence after meeting the Finance and Defence Minister Arun Jaitley. Grillo told this writer, German industries would not like to transfer technology if they are not able to control the investments they have made. If you have a critical technology in a sensitive area, German companies would like to have some control of it. Dr Hubert Lienhard, Chairman of the Asia-Pacific Committee of German business (APA), commented, It is better than old ruling ( 26 per cent FDI). But the 49 per cent FDI limit is not ideally we would like to see.”

The raising of the FDI limit in the 2014-15 defence budget was the major highlight of the Jaitley budget speech in Parliament on July 10, 2014. The defence and strategic circles were waiting to see any dramatic move by the new Narendra Modi-led NDA Government, but Jaitley could not go beyond the traditional route. Even he bordered on conservatism when he refused to allow FDI beyond 49 per cent, which would have allowed majority stake to foreign arms majors. In fact when the country is at the cusp of modernising its armed forces and would be acquiring weapons systems worth $100 billion in next one decade, the government should have jumped several steps to encourage the foreign companies to manufacture their systems on Indian soil itself. Perhaps the logic behind the decision to disallow foreign ownership of defence firms on Indian soil was the security concerns. However the talk of security concerns looks redundant when we find that the same weapon system manufactured from the foreign soil would be totally controlled by them and the Indian Government would not have any leverage on them. However if the government allows them to manufacture the weapon system in India under their ownership, it would have automatically encouraged them to bring their machinery and technology while skilled manpower would have been sourced from India. The foreign arms majors would not have dared to deny India necessary spare parts in times of crisis whereas if they were to manufacture their systems on their own soil, they would be susceptible to their governments sanctions in case the country concerned want to harass Indian Government.

Since the armed forces cannot wait indefinitely to get deliveries from India-based foreign companies working on joint ventures with minority foreign stakes in their partnerships, they would always prefer to import them from other sources, because of immediate combat requirements. The foreign arms companies would not be loser as in any case they have to supply the weapon systems manufactured from the place of their choice, However, if they were to have been based in India, they can be forced to listen to Indian dictates, in times of crisis.

Political observers are of the view that the NDA Government is also bitten by the same bug of populism. Since the Antony-led MoD of the UPA Government was very vocal against raising of the FDI limit in defence on the excuse of concerns relating to security, the Jaitley led MoD under the NDA Government did not substantially budge from this outdated view and failed to announce this big-ticket reform in view of the forthcoming elections in few states including the crucial Maharashtra state, where the Congress would have launched scathing criticism of the Modi Government of having compromised on nation’s security interests by inviting the foreign arms majors without any preconditions. Probably Jaitley also buckled under the corporate pressure, who advised Jaitley not to cross the 49 per cent barrier, after which the government would have to give them the control over the joint ventures in defence sectors.

On raising of the 49 per cent FDI limit in defence sector through the Foreign Investment Promotion Board (FIPB) route with full Indian management and control, Jaitley said, “India today is a largest buyer of defence equipment in the world and domestic manufacturing capabilities in this area are still in a nascent stage. We are buying substantial part of our defence requirements directly from foreign players, companies controlled by foreign governments and foreign private parties are supplying our defence requirements to us and at a considerable outflow of foreign exchange.”

“Currently, we permit 26 per cent FDI in defence manufacturing. The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route,” Jaitley said. The previous UPA Government had permitted FDI limit to 26 per cent through FIPB approval route and allowed FDI up to 100 per cent through the Cabinet Committee on Security-approval route.

The 26 per cent FDI limit was first introduced in 2001, in the immediate aftermath of the Kargil conflict when Indian armed forces faced sudden crisis like situation of scarcity of ammunitions. However, till now this policy has only resulted in $5 million foreign investment in India. In view of this experience, the Department of Industrial Promotion and Policy of the Commerce Ministry had reiterated its original proposal of 2010 for allowing 74 per cent FDI in defence sector and had also stated that the limit could be raised to 100 per cent in some select cases. When Jaitley took over as Defence Minister, he promised to consider the DIPP proposal which was widely welcomed in the industry circles. Now that the 49 per cent limit has been announced, the defence industry will wait for the actual response from the foreign arms majors, till the presentation of the next defence budget.