Modified Defense FDI Policy Awaits Test Case

The announcement of changes in Foreign Direct Investment (FDI) in the defense sector by the Indian government earlier this week has given defense industry much to think about.

While earlier the government allowed FDI in the defense sector up to 100 percent upon government approval in case of ‘state of the art’ technologies, Monday’s announcement allows exactly the same for ‘modern’ technologies.

The problem is that neither of the terms are defined anywhere. The silver lining is that ‘modern’ technologies may reasonably be understood to be a much larger set than ‘state of the art’ technologies. Only a test case would determine what would fly, though. 

Here’s what Airbus had to say about this:

The defence FDI policy amendment introduced by the government is very pragmatic because ‘state-of-the-art’ technology was not defined in the previous policy and the way it was, it conveyed a one-dimensional perspective on why a foreign OEM could require more equity stake. The new policy wording communicates the realization that there may be several other genuine reasons for the government to allow more than 49% stake to the foreign OEM in a joint venture with an Indian company and they want to take advantage of these for the benefit of the indigenous industry.

Saab said:

We see each the relaxation of FDI norms in multiple sectors as an important step towards increased cooperation between Indian and foreign industry, in line with the Make in India initiative. We are encouraged by the Government’s intent to facilitate ease of doing business for Defense OEMs like us who are looking at expanding their industrial presence in India.

But it remains open to question whether such policy changes would actually make a difference considering the slothy, even comatose character of the defense acquisition process in India. Yes, we know these aren’t acquisitions that will happen overnight. No, we do not understand the delay in clearing orders that have already been approved at every other level.

Such inertia, whether driven by bureaucratic indifference or anxiety, or a lack of political clarity, invariably fuels speculation about interference in the acquisition process by interested third parties. 

Further, resorting to ‘G2G’ to hasten the process or ensure integrity, is bewildering, considering it is the government’s own Defense Procurement Procedure (DPP) that it is choosing to circumvent, in acknowledgment that it doesn’t work.

Reforming the DPP has also been a lengthy and tiresome process and in the absence of the silver bullets on strategic partnerships and blacklisting, is hardly complete. Even the new iteration is more cosmetically altered than actually now reflecting a vision behind it. 

In principal approval for 100 percent FDI in the case of ‘modern’ technology is great. But may we draw attention to the numerous acquisition cases swirling in the black hole of limbo.