Global war industry won’t bite the budget bait

Why is India so touchy about allowing foreign defence manufacturing giants to set up military hardware production shops in the country? Like many others, Narendra Modi too had been asking this question to himself as well and spoken at public gatherings on the need for strengthening the domestic base of military hardware production even before he aspired to become India’s prime minister. 

His scientific mind found no logic towards the country’s long-standing distrust for domestic private initiative in manufacturing weapons, battle tanks, missiles, guns, rockets, combat aircraft, submarine, battle ships, electronic surveillance gadgets and security devices while the government went on spending large foreign exchange in procuring those military hardware from foreign private and government-backed companies based outside the country at huge costs, decades after decades. 

Therefore, the 49 per cent FDI in defence production announced by Finance Minister Arun Jaitley would appear to be a right step in the right direction.

India, currently the world’s largest war equipment importer for the fourth successive year, probably wants global military hardware and security devices majors such as Lockheed Martin, Boeing, General Dynamacs, Raytheon, Northrop Grumman, L3 Communications, United Technologies (all from the US), BAE Systems (UK), EADS (the Netherlands), Almaz-Antey (Russia), Finmeccanica (Italy) Rheinmetall (Germany), Dassault and Thales (France) Mitsubishi (Japan) and Elbit Systems (Israel) to come and invest in India in hi-tech weapon systems manufacture which they can directly sell to Indian armed forces and export the surplus. Unfortunately, Jaitley’s offer is too little, coming too late with a rider that few owners of sensitive defence technology might find attractive enough to start up capital-intensive war equipment manufacturing plants in India. 

The budget provided that FDI-funded defence production firms would be under Indian management control. This is a very unrealistic approach to a novel move seeking to induce foreign firms to manufacture military and security products in India, primarily for their sale in India.

The 49 per cent FDI in defence hardware production itself as a starter may have been acceptable even to some of the big war equipment majors provided that the government left the control issue with the foreign investors and their domestic shareholders. Many Indian joint sector companies are controlled and managed by promoters, having less than 30 per cent equity stake. For many years, Tata Sons managed its flagship venture, Tata Steel, holding less than five per cent shares in the company. Post-FERA1973 (now defunct), many foreign companies managed their India-based enterprises with less than 40 per cent shareholding. Therefore, 49 per cent FDI as a beginner in hi-tech defence production would have still been considered okay by big foreign firms if it did not come with the tricky rider. The best thing would have been if the government allowed at least 51 per cent FDI in Defence, to begin with.

‘Trust is the key in international business and investment. Sensitive and high-end (critical) technology owners generally like to control their enterprises at home and abroad. This is natural,’ said Ulrich Grillo, president and chairman of the Federation of German Industries (BDI), who met Finance Minister Jaitley along with other BDI representatives the very next day after the budget presentation in Parliament. 

The team is generally happy with the budget initiatives and was in high praise for the Modi government and Jaitley, but avoided clear answer to the question on the possibility of German FDI in defence in India. ‘It is for German firms to decide,’ Grillo was understandably evasive in his reaction. The BDI team, including Juergen Fitschen, Deutsche Bank’s co-CEO globally, and Hubert Lienhard, president and CEO of Voith, which was scheduled to meet representatives of FICCI and CII, India’s leading business and industry bodies, was more enthusiastic about the opening up of the insurance, transportation and real-estate sectors. German technologies in transportation and construction are globally acclaimed. 

Germany which has 6,000 FDI-fed enterprises operating in China as against 1,500 in India, waiting to see things move in India at a faster pace for its technology companies and services sector firms to expand business and investment ties with India. Incidentally, Germany, the world’s fifth largest exporter of militaryware, notably in the area of naval and land systems, does not like to boast of its strength in the politically sensitive business.

Nearly 70 per cent of India’s high-end war equipment needs are currently met through imports. That is hardly an encouraging news for the world’s seventh largest country by geographical size, which is required to defend a 7,500 kms of coastline and 15,000 kms of land borders with Pakistan, China, Nepal, Bhutan, Myanmar and Bangladesh. India spends $6-7 billion annually in defence and security gears imports. They may reach $ 10 billion by 2020. It is not the amount spent on defence imports that is a cause of national concern. 

The most worrisome aspect is the country’s growing dependence on imported weapons and military hardware systems and parts to defend its sovereignty, not to mention about its corrupting influence on India’s political executives and defence brass. Nearly, 70 per cent of India’s sophisticated war equipment, are procured from abroad.

 International arms merchants, who promote defence sale through influential agents across the world, are regarded as the most corrupt in international trade. Arms exporters and their notorious agents have been making mullah out of India’s huge defence imports. Any political party that opposes FDI in defence only promotes the cause of corruption in defence import and compromises on the country’s national security in the face of external aggression.

The latest Swedish think-tank Stockholm International Peace Research Institute (SIPRI) report on the global arms trade ranked India as the world’s biggest arms buyer, importing nearly three times as many weapons as its nearest competitors China and Pakistan over the last five years. The report is an eye opener for those who are still against global arms major setting up manufacturing units in India. The volume of global arms sales to India was up 14 per cent during 2009-13 compared to the previous five years. Indian imports of major weapons rose by 111 per cent in the last five years compared to 2004-08. Its share of total global arms imports increased from 7 to 14 per cent, SIPRI said.

With China and Pakistan emerging as the second and third largest arms importer, respectively, India has little choice but to strengthen its position in the arms race. China is also one of the world’s top 10 arms exporters with 55 per cent of its consignments being Pakistan-bound. India’s traditional rival Pakistan increased its weapons acquisitions by 119 per cent, growing from 2 per cent of the global total to 5 per cent during that period. Going forward, the only logical way to face the situation is to raise FDI in India’s critical defence production and convert its import might into higher domestic production at attractive terms to benefit both sides. With a more liberal defence FDI, India, some day, could even emerge as a top global arms exporter as Germany’s BMW unit in South Carolina has recently become the biggest ‘Made-in-USA’ car exporter.