FDI in Indian Defence Sector


Published on

Published in: Business, Economy & Finance
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

FDI in Indian Defence Sector

  1. 1. Foreign Direct Investment in Defence- Failure to attract FDI Hitendra Hiremath IVth B.B.A.,LL.B. KSLU’s Law School Hubli/Legal Intern Atman Law Partners, Bangalore
  2. 2. Introduction Since 2001, India has allowed foreign direct investment (FDI) up to 26 per cent in its defence industry. The policy has, however, not been successful in bringing about any meaningful financial or technological inflows, primarily because of the lack of incentives in the policy for foreign investors. Keeping in view India’s underdeveloped R&D and production base, and various defence industry-related policies and provisions whose success is contingent upon a liberal inflow of FDI, an increase in the foreign investment cap up to 100 percent would be logical, instead of a fixed cap-based method, which may be a constraint to desirable inflows.
  3. 3. However, given the sensitivity attached to defence-related FDI, each investment should be subject to wider review and impact analysis following which the FDI percentage could be determined varying between zero and 100 per cent.
  4. 4. Defence Budget: 28.34 29.74 32.88 33.7 40.73 0 5 10 15 20 25 30 35 40 45 2009 - 10 2010 - 11 2011 - 12 2012 - 13 2013 - 14
  5. 5. ALLOCATION OF DEFENCE BUDGET SERVICE WISE Army Air Force Navy DRDO Other 17.48 5.21 Army Air Force Navy DRDO OFB Other 5 1 2012 - 13 2013 - 14 24 19 1 50 27.91 0.47 48.93
  6. 6. Select Sector-wise FDI inflow,April 2000 to May 2010 Source: http://dipp.nic.in/fdi_statistics/india_fdi_index.htm. Rank Sector Amount of FDI inflows (US $ million) 1 Service Sector 24,227.48 2 Computer Software & Hardware 10,168.37 3 Telecommunications 9821.17 4 Housing &Real Estate 8519.25 5 Construction & Activities 8190.85 6 Soaps & Cosmetics 173.19 7 Timber products 37.07 8 Defence Industries 0.15 Grand Total 120,155.25
  7. 7. Year Development 2001  Defence Sector opened to Private Industry  26% FDI 2002  Defence Acquistion Council(DAC) created  Buy Category introduced 2003  Buy and Make category wit ToT introduced 2004  Kelkar committee constituted for revision of Defence Procurement Policy and participation of private sector 2005-2009  Defence Offset Policy formulated (2005) and Defence Offset facilitation Agency (DOFA) created  Make & Buy and Make Indian categories (2006 & 2008)introduced 2011  Offset scope enhanced to include aerospace and Internal Security July 17th  FDI increased to 49% (waiting for parliament approval)
  8. 8. Failure to attract FDI in Defence No Significant control to the investing companies Strict Capacity/Product Constraints, No Purchase Guarantees by the Govt. No open access to other markets (including exports) Unfair advantage to the local public sector. Vested interests-Defence Public Sector Units (DPSU’s)
  9. 9. Need for more Foreign Investment Greater FDI inflow in defence sector provides substantive economic advantages. Transfer of advanced sensitive technology. Making India as a home market (major domestic sales market and global manufacturing hub) Benefit to private defence manufacturers in funding as well as technology.
  10. 10. Addressing Concerns • National security and secrecy • Management Control with foreign investors. • Investments to be done through the Govt security bodies not through Govt Economy Bodies(FIPB)
  11. 11. Defence Investment in USA Defence Production Act,1950. Foreign Investment and National Security Act of 2007 (FINSA) Under these Acts, the US president is authorized to “suspend or prohibit foreign acquisitions of U.S. companies if they are determined to pose a threat to national security.” Committee on Foreign Investment in the United States (CFIUS):application to the agency is investigated within a period of 45 days, for the possible impact of the proposed investment on national security with reference to a pre- identified set of factors, ranging from possible impact on national defence industrial base to commitment to non- proliferation by the FDI-originating country.
  12. 12. 49% or more… Ineffectual in getting technological enhancement Transfer of technology without ownership and management control over the Indian venture Shall overcome very few of the drawbacks currently faced by an FDI cap An increase to 51 percent, if not 100 percent, to make a significant difference to the Indian defence industry
  13. 13. Conclusion The case for raising the cap primarily rests on increasing investment and the transfer of foreign technologies which will kick-start the development of Indian defence sector. In contrast, those arguing for maintaining the FDI cap at base their arguments on sovereignty and security of supply issues and promoting organic industry development; although all these objections can be overcome by strong government regulation.
  14. 14. Questions?
  15. 15. Thank You