JOIN USDefence minister A K Antony has rightly rejected the demand for increasing the foreign direct investment (FDI) ceiling in the defence production sector.
There has been lobbying in recent days for raising the FDI cap in the strategic sector. The existing limit is 26 per cent. A government panel under economic affairs secretary Arvind Mayaram had recommended a hike in the ceiling to 49 per cent. Commerce minister Anand Sharma has been a strong supporter of the proposal, and has suggested an increase of the limit to 74 per cent. Even after Antony’s statement, Sharma has expressed confidence that the proposal will be pursued. He has said that the matter is still under discussion within the government and a final decision is yet to be taken.
While there is a case for higher foreign investment in the economy, in view of the increasing current account deficit, investment in sensitive sectors like defence should be treated with caution. India is the world’s largest importer of arms and there is a huge outgo of foreign exchange on this count. The argument in favour of increased FDI limit is that it will encourage production within the country of many defence items which are being imported now. But it will also heighten the country’s vulnerability by increasing the dependence on foreign companies in a vital sector. There is a risk in the import of arms and equipment because the companies that supply them can, for commercial or other reasons, renege on their commitments. There is a bigger risk in allowing production within the country for the same reasons. Apart from the possibility of supply disruptions there may also be problems related to loss of confidentiality of information, which may compromise security. It will also discourage development of local expertise and facilities.
The best course for the country is to develop indigenous capability in design and manufacture of arms and equipment. Much of the defence production in the country is undertaken by public sector undertakings. They have not been known to be efficient. But private sector can be involved on a much larger scale than at present. There is a sufficiently strong industrial base in the country to support defence production. In fact defence production can give a further boost to the industrial sector. Exceptions can be made even within the present FDI framework after careful deliberations on individual cases. But it is advisable to continue the present policy, with an increased emphasis on domestic production.