The recent Indian Union Budget announced the new government’s policy of allowing 49% foreign direct investment (FDI) in the defence sector. Whether this will accelerate the process of indigenization of the defence sector and pave the way to greater self-reliance, or whether it will compromise India’s national security, (as former Defence Minister, A.K. Antony seems to believe) remains to be seen. There are also other concerns regarding the impact that this will have on domestic defence research, development, and manufacturing sectors. Of course, the more important question is how this will be viewed by Pakistan, given the latter’s insecurity regarding the conventional asymmetry between it and India. I argue though, that the increase in FDI is a more domestic politics-centric (call it development or otherwise) move, rather than a bid to signal increased future power projection to India’s neighbours.

India currently imports 70% of its defence equipment. Given this worrying and entirely undesirable statistic, it is expected that the increase in FDI from 26% to 49% shall help stem this tide. Other concerns relate to defence manufacturing and production. Earlier this year, it was reported that the Army is terribly short of ammunition with barely 50% of the required war wastage reserves. This basically meant that India can barely last 20 days in a war before it runs out of ammunition. Tales like these reinforce the idea that defence manufacturing and production in India are in need of a fillip and that it is high time that India created (or tried to anyway) a strong supply line for its defence sector.

It is also hoped that this move will benefit India owing to transfer of technology to it, or joint development of high technology in joint venture- (JV) like setups. The successful BrahMos Aerospace JV, between India (DRDO) and Russia (NPOM) is an example of such an endeavour. Developing weapons systems like the BrahMos and exporting them shall definitely augur well for the Indian defence sector. However, 49% FDI does not necessarily imply technology-sharing. The finer details of the latter have been left unclear at the moment (and probably why there is new Technology Development Fund worth INR 100 crore). Whether there will be a possibility of having even higher FDI (74% to 100%) with absolutely no technology-sharing also remains to be seen. What is clear though, is that with foreign players entering the Indian market, the DRDO and Public Sector Undertaking (PSU) companies that hitherto enjoyed a monopoly in the Indian domestic defence sector will be on their toes. The influx of foreign players may lead the DRDO to have a greater impetus to perform, in order to retain its exalted status in the Indian defence research and development sector. This is probably the only way that the cause of developing purely ‘indigenous’ technology can be furthered.

Should Pakistan be worried about this development? Greater FDI in defence in India means that there will be an influx of foreign players, greater defence manufacturing and production, and perhaps even weapons exports. Is that inherently destabilising to the India-Pakistan relationship?

No, it is not. For starters, for the FDI to flow in, joint ventures to be created, research and development to take place, and new weapons systems to go into production will take a long time. This thus does not create any immediate crisis. It must also be noted, that while the move by India may be construed as an attempt to further the conventional asymmetry that is present between the two countries, in actuality this move is in keeping with the policy of cutting down on imports and reclaiming the process of defence production. FDI in defence (if it works out the way it is meant to) should also give the Indian economy (both public and private sector) a boost through its offsets policy, that is mandatory for all foreign investors to reinvest in the domestic market at least 30% of any contract worth above of INR 300 crores. The change in FDI policy is thus a more inward looking change than an outward looking move to signal increased future power projection.

Though it does feed into the asymmetry narrative, it is important for Pakistan to note that advancements in technology and defence production are a natural part of any state’s ambitions to ensure strategic independence. This is a sector that has been hitherto neglected in India and the change in policy has been due for a long time.


Image: Pal Pillai-AFP, Getty

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