In 1991, when Prime Minister P.V. Narsimha Rao and then Finance Minister Manmohan Singh opened up the gates of Indian Economy they deliberately left some gaps for the successive governments to fill at later stages. Foreign Direct Investment was one of the salient features of liberalization in 1991. However, some sectors like defence and railways became untouchables when it came to FDI. Successive Governments were reluctant to allow any FDI in the crucial defence sector on the assumption that this might compromise the country’s security. In 2001, under intense pressure from security experts, NDA bit the bullet and opened up the defence sector to private companies allowing the ceiling at 26%. However, since 2001 barely $5 million has flowed into the sector and no breakthrough innovation has changed the sector for good. Recent decision by government to increase FDI cap to 49% is attracting comments from every nook and corner of the economy. Where security experts consider this as a wrong move by the government, there are many others who think that the move will hardly make any difference and this is because there are strings attached to this hike. The hike in FDI cap comes with a condition that control in the Joint Ventures for manufacturing defence equipment will remain in India. The move is aimed at giving thrust to domestic industry, which imports close to 70% of military hardware, but it is actually proving out to be futile because of the condition following it. So essentially it does not matter whether you increase FDI to 49% or 74 % or even 100%, because until and unless government makes the defence sector look like a favorable investment no player would like to play for the reward involved. Government of India should have no connection whatsoever with the industry and open it to private players for the greater good of country. FDI in defence can considerably reduce defence budget without compromising on quality. But there are also some apprehensions about being lenient in an industry as critical as defence. Experts comment that increasing FDI to 100% and letting private players play their game freely can turn out to be harmful in the long run. India runs the risk of being used as a manufacturing hub without any substantial innovation by private players.
In effect, opening the defence sector to private players is actually a catch-22 kind of situation. So what can be done? India should actually go for transferring technology rather than buying fully furnished military hardware. Investing in joint development programs like that of BrahMos can actually pay in the long term. A 100% or 75% FDI in defence is not a solution because companies entering India will guard their technologies and India in the end will end up with nothing. FDI in defence should be well thought out and as ex Finance Minister P. Chidambram once stated “ It should be on case basis and only state-of-the-art sectors as defined by defence ministry should be totally opened up to private players”. Thus we can say that FDI in defence is an opportunity, provided India uses it to its advantage .However, India has not been able to use this opportunity even remotely and it is proving out to be a lost cause as of now.
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