IT is not only in the social and economic areas that different ministries in the UPA Government have crossed swords. Even in the strategic sectors including national security, the ministries are working at cross purposes.
The Prime Minister Dr Manmohan Singh has visibly and miserably failed to reign in his super-jumbo cabinet.
A case in point is the blatant attempt by Ministry of Commerce and Industry (MCI) to plug for radical liberalisation in the defence sector to favour foreign investors in total disregard for the Defence Ministry’s firm stand on the issue.
On May 17, MCI’s Department of Industry Policy and Promotion (DIPP) issued a discussion paper on foreign direct investment (FDI) in defence sector suggesting hike in FDI cap to 74 per cent from the present 26 per cent.
In this process, DIPP has turned a blind eye to the Defence Ministry’s considered and determined decision to retain FDI cap at 26 per cent and consider requests for higher percentage of FDI on case to case basis.
While seeking comments of stakeholders on the discussion paper, DIPP says: “Defence being a sensitive and strategic sector, the views of the Defence Ministry will be taken on board before taking the next steps forward”.
According to a governance analyst, DIPP should not have issued the paper without consulting Defence Ministry. DIPP has exceeded its brief as a nodal department for industrial policies in this case.
DIPP has aired it’s intend to release more such papers on various aspects related to FDI and claims the one on defence sector is step in this direction. Analysts wonder why DIPP chose defence sector first for public consultation and not other sectors that offer higher employment generation opportunities such as allowing FDI in merchant sale-oriented coal mining.
It remains to be seen whether DIPP would issue subsequent FDI papers unilaterally or after consulting the administrative ministries concerned.
Analysts also wonder whether DIPP would pay heed to what Prime Minister Dr. Manmohan Singh said at the national press conference on May 24. Replying to a question, Dr. Singh stated: “It is not good that the ministers should air their differences in public”.
There was actually no need for a discussion paper as Defence Ministry had only in March 2010 articulated stance for status quo while turning down recommendation of Parliamentary Standing Committee (PSC) on Defence to examine the possibility of hiking FDI cap to 49 per cent.
In its reply on this recommendation, Defence Ministry said: “The Ministry is of the view that as defence is a strategic sector the foreign investment in joint ventures in defence sector should be limited to 26 per cent. Any FDI increase beyond 26 per cent would be considered on a case to case basis”.
The right course for DIPP would have been to hold direct consultations with Defence Ministry and other entities directly concerned with the national security. All concerns underlying majority FDI stake in defence sector ought not to be put in the public domain. The generic pros and cons of enhanced FDI in defence sector are too well known and hardly require fresh public consultation.
Defence Ministry had told PSC in December 2008 that “FDI levels of more than 50 per cent would imply that the management control would be with foreign investors. Therefore due to the strategic nature of the Defence Industry, there is an apprehension that such ventures would fail at critical times since there would be possibilities of withdrawal on the basis of embargoes/sanction/pressures imposed by foreign governments or international agencies.”
DIPP has sought to play down such concerns in its discussion paper. It argues: “the fear that we may develop a relationship of exclusive dependence, with regard to a particular foreign country, for capital and technology, may not be well-founded in the present day context and the concern that increasing the cap would lead to control being passed on to foreign capital with a specific national denomination can be easily taken care of”.
DIPP has also alleged that “the major reason for reluctance in encouraging the Private Sector into defence production and welcome FDI in the sector is on account of concern for the defence PSUs and the ordinance factories”.
DIPP has concluded that the 26 per cent FDI cap has failed to attract modern technologies in the defence sector. Increase of cap to 49 per cent will not give any additional say to the foreign investor in the affairs of the company under the Companies Act. The hike in FDI ceiling to 49 per cent as advocated by some industries associations will not really help India in getting the best technology partners.
DIPP contends: “By merely increasing the limit from 26 per cent to 49 per cent we may be accused by posterity of doing too little and too late. Therefore, in case we really want to have the state of the art technology, we have to permit anything above 50 per cent if not 100 per cent. It may be, therefore, desirable to allow either 100 per cent or 74 per cent as in the case of telecom sector. Since there is licensing provision also in the defence sector, we can refuse to permit FDI in the sector by refusing the license where the background of the company is suspect.”
This stratagem is similar to the cigarette industry, where the Government kept on paper policy permitting 100 per cent FDI but never cleared a single proposal till the imposition of FDI ban in May 2010.
It is better to have a clear-cut, straightforward and sincere policies rather than throwing wool in the eyes of foreign and Indian private investors.
That the UPA Government is under pressure from various quarters to liberalise FDI in defence sector is evident from a joint study by Confederation of Indian Industry (CII) and Global consultancy major KPMG release in January this year.
The study says: “The case for a higher Foreign Direct Investment cap in Indian defence industry is one of the most hotly debated issues amongst defence industry players. Opinion on a higher FDI cap appears to be divided. The case for raising the cap primarily rests on increasing investment and the transfer of foreign technologies. The case for maintaining the FDI cap is founded on sovereignty and security of supply issues and promoting organic industry development. Whatever the arguments, the clear expectation of industry is that the FDI cap will be increased above its current level of 26 per cent”.
