Defence procurement from Indian vendors dropped almost 11% year-on-year in FY19 to almost Rs 39,000 crore, the lowest in five years. India’s defence budget is estimated at Rs 3.38 lakh crore (excluding pension) in FY21

by Banikinkar Pattanayak

In a significant move, India on Saturday decided to further free up its foreign direct investment (FDI) policy by allowing up to 74% FDI in the sensitive defence manufacturing sector through automatic route, paving the way for global majors like Boeing or Lockheed Martin to hold controlling stakes in potential joint ventures.

Currently, although up to 100% FDI is allowed in defence, such investments beyond 49% require government approval, thus hampering the FDI inflows. The extant policy says the approval is required “wherever it is likely to result in access to modern technology or for other reasons to be recorded”. This has now become redundant for a global defence giant seeking to set up manufacturing base in India with controlling stake.

At the same time, in a push for indigenisation that has remained stunted for years, the government also announced that it will ban imports of a list of weapons that can be manufactured locally. Announcing these decisions, finance minister Nirmala Sitaharaman said separate budget provisions will also be made for domestic capital procurement in defence. The ordnance factories will be corporatised and listed later, so that their autonomy, accountability and efficiency improve.

Bharat Forge managing director Baba Kalyani lauded the government’s move. In an interview to CNBCTV-18, he called the indigenisation move a game-changer and wanted the Centre to follow up the decision by placing an order, initially to the tune of Rs 10,000 crore, to boost confidence. The country has the capacity to become a major exporter of weapons like artillery and small arms in the next five to seven years, he said.

Analysts have pointed out that the private sector in India has less than a 5% annual share of direct orders from the defence ministry for manufacturing. Defence procurement from Indian vendors dropped almost 11% year-on-year in FY19 to almost Rs 39,000 crore, the lowest in five years.

It is expected that the indigenisation drive will help curb India’s rising defence expenditure, the country being one of the largest importer of weapons and other defence equipment in the world.

India’s defence budget is estimated at Rs 3.38 lakh crore (excluding pension) in FY21, up 9% from the budgeted level last fiscal. Capital expenditure is pegged at 35% of it. However, India’s defence expenditure, including pension, as a proportion of central government expenditure and GDP has decreased in the past 10 years. In 2010-11, defence expenditure made up for 2.5% of GDP and 16.3% of central government expenditure, which has decreased to 2.1% of GDP and 15.5% of government expenditure, respectively, in 2020-21.

The minister stressed that the indigenisation drive won’t in any way affect India’s defence preparedness as the General Staff Qualitative Requirements (GSQRs) of weapons/platforms will be fully adhered to.

To cut delays in defence procurement, which was a sore point with the armed forces, especially during the UPA-II, the government will fix a time-bound purchase process and fast-track decision-making by setting up of a project management unit (PMU) to support contract management. The qualitative requirements of weapons or various defence platforms will be set at realistic levels to encourage competitions, as stringent criteria often leaves the defence establishment with only one bidder. The defence trial and testing mechanisms will also be overhauled.

These decisions will help attract foreign investments in defence, boost domestic manufacturing, fast-track decision-making and reduce huge defence import bill, the government said.

As for the foreign investments, India’s defence industries witnessed an FDI inflow of just $8.82 million between April 2000 and December 2019, against cumulative inflows of $457 billion, according to the DPIIT data. This meagre inflows suggest India needed to liberalise the FDI policy to grant controlling stake to foreign entities, if it wishes more investments.

Atul Pandey, partner at Khaitan & Co, said, “Given the Prime Minister’s recent push for ‘local’, the announcement on increasing the FDI limit under automatic route from 49% to 74% is certainly a welcome move and will give a major incentive to foreign defence manufactures who want to retain control on the Indian SPV which will be engaged in defence manufacturing.”