Indian Defense FDI Cap Increase Has No Impact On Investment Inflow

The increase in foreign direct investment (FDI) cap from 26 per cent to 49 per cent in Indian defense sector has had no impact on the investment flow and has only managed a miniscule INR 48 lakh (US $0.08 million) in the past year.

The defense sector has had no impact in bringing FDI and has remained unaltered from previous years. The defense sector ranks 62 of 63 only behind ‘coir’ industry. Lesser known industries like ‘mathematical surveying and drawing instruments’ and ‘glue and gelatine’ have attracted more investment than defense, Indian Express news daily reported quoting Indian news agency.

Defense sector contributed just USD 0.08 million (Rs 48 lakh) FDI of the total inflow of USD 44,877 million. Figures reveal that since 2000, when the FDI cap was 26 per cent, the country’s cumulative inflow was Rs 24 lakh in 2011, Rs 17.68 crore in April 2012, Rs 24.36 crore in April 2013, and remained unaltered during the previous government.

The statistics further reveal that despite having promoted defense as one of the prime sectors under the ‘Make in India’ initiative, the sector has contributed zero per cent of the total FDI inflow in the country.

The hesitation by global defense manufacturers in bringing investments into a technology-heavy sector such as defense production is linked to the fact that they do not want to end up becoming minority stakeholders in a joint venture with an Indian player. As a result, the transfer of technology is a bone of contention.

Foreign defense sector players also have serious reservations with the offset guidelines. As a result, the JVs that have been inked so far have largely failed to take off and has effectively contributed to the dismal investment inflow into the defence production sector.

Amit Cowshish, a former financial adviser (Acquisition) in defense ministry, said the lacklustre attitude of foreign investors towards Indian defense business is due to absence of policy framework and lack of orders.

“People will invest only if they see orders. There is no investment as there is no buying. Most of the JVs created have been on paper. There are no orders. Further, the make procedures under the defense procurement policy are forever under revision. They would invest only if they see business prospects,” Cowshish said.