Recent developments in India’s defence manufacturing landscape reveal challenges. Despite a decade of initiatives like ‘Make in India’, foreign direct investment (FDI) in defence remains low. From September 2020 to May 2022, defence-related FDI amounted to only $65 million. The government had hoped that allowing 74% FDI through joint ventures (JVs) would attract foreign original equipment manufacturers (OEMs) to set up operations in India. However, this has not materialised as expected.
Investment Limitations
The current FDI cap of 74% is insufficient for foreign OEMs. They often require 100% ownership to transfer advanced technologies. The ‘Buy (Indian-Indigenously Designed, Developed and Manufactured)’ category restricts foreign ownership to 49%. This limitation discourages foreign investment and technology transfer.
Intellectual Property Challenges
The policy requiring local partners to acquire intellectual property (IP) rights poses another hurdle. Foreign OEMs are reluctant to sell advanced weapon system IP. In many cases, IP is controlled by foreign governments rather than the OEMs themselves. This makes collaboration difficult.
Indigenous Content Requirements
The indigenous content rule mandates that 50% of contract value be sourced locally. This requirement forces foreign OEMs to alter their supply chains . Such restructuring is seen as a deterrent, especially when combined with FDI and IP restrictions.
Government-Funded Projects
The challenges have severely impacted 44 government-funded Make-1 projects. These projects rely on foreign collaboration, yet no foreign OEM has engaged. Their role is limited to being tier-1 technology partners, which constrains their contribution to India’s defence capabilities.
Need for Paradigm Shift
To break the current impasse, a paradigm shift is essential. Allowing foreign OEMs to operate as primary systems contractors with full ownership could enhance local manufacturing. The Defence Acquisition Procedure (DAP) 2020 framework could facilitate this if it permits 100% FDI wholly-owned subsidiaries to qualify as Indian vendors.
New Procurement Categories
The introduction of ‘Buy (Global-Manufacture in India)’ in DAP 2020 allows foreign OEMs to bid for contracts while manufacturing locally. This could attract substantial investments and encourage advanced technology transfer. However, no specific programmes have been identified under this category yet.
Future Opportunities
The forthcoming DAP in 2025 presents important opportunity for reform. Prioritising indigenous content over IP could enhance resilience against geopolitical uncertainties. By leveraging their experience, foreign OEMs can strengthen India’s defence manufacturing capabilities.
Questions for UPSC:
- Examine the impact of foreign direct investment restrictions on India’s defence manufacturing capabilities.
- Critically discuss the challenges faced by foreign OEMs in transferring technology to India.
- Analyse the role of indigenous content requirements in shaping India’s defence procurement policies.
- Point out the potential benefits of allowing 100% foreign ownership in defence manufacturing for India.
Answer Hints:
1. Examine the impact of foreign direct investment restrictions on India’s defence manufacturing capabilities.
- FDI cap of 74% is inadequate for foreign OEMs seeking control over advanced technology.
- Restrictions under ‘Buy (Indian-IDDM)’ limit foreign ownership to 49%, deterring investment.
- Low FDI inflow ($65 million from Sept 2020 to May 2022) reflects lack of interest from foreign firms.
- Foreign OEMs remain tier-1 partners, limiting their contribution to local manufacturing capabilities.
- Without a shift in ownership policies, India may struggle to enhance its defence production capacity.
2. Critically discuss the challenges faced by foreign OEMs in transferring technology to India.
- Foreign OEMs require 100% ownership for effective technology transfer, which is currently restricted.
- IP rights policies compel local partners to acquire technology, but OEMs are hesitant to sell advanced IP.
- Many advanced technologies are controlled by foreign governments, complicating transfer negotiations.
- Indigenous content mandates force foreign OEMs to restructure supply chains, creating additional barriers.
- Overall, restrictive policies lead to a lack of collaboration and reduced technological advancement in India.
3. Analyse the role of indigenous content requirements in shaping India’s defence procurement policies.
- The indigenous content requirement mandates 50% local sourcing, aimed at boosting domestic capabilities.
- It encourages foreign OEMs to partner with local firms, yet complicates supply chain management.
- High IC requirements can deter foreign investment, as firms may find compliance challenging.
- IC rules may limit foreign OEMs to tier-1 partnerships, reducing their capacity to innovate locally.
- Balancing IC with FDI and IP policies is crucial for sustainable growth in India’s defence sector.
4. Point out the potential benefits of allowing 100% foreign ownership in defence manufacturing for India.
- 100% foreign ownership could attract substantial FDI, enhancing capital inflow into the sector.
- It would facilitate the transfer of advanced technologies, boosting India’s defence capabilities.
- Increased foreign investment could lead to job creation and skill development in the local workforce.
- Allowing full ownership may encourage foreign OEMs to establish comprehensive manufacturing operations in India.
- This shift could position India as a competitive manufacturer and exporter of defence systems globally.
