Modi Buries the East India Company Ghost in Yelahanka

“India could welcome majority foreign direct investment, FDI, in high technology defence manufacturing. “

It was said in an even tone, but it out-roared the raging aero show at Yelahanka air base in Bengaluru. Prime Minister Modi had just tossed Indian policy-makers’ most dangerous taboo into oblivion.

This dreadful story began in 1985 with one word… Bofors! People of my generation will never forget the Rs 64-cr (in current values, about Rs 1000 cr) “commission” that was paid for the import of those field guns. That bribery allegation felled Rajiv Gandhi’s government in 1989. And Bofors was banned by the Indian government.

Now here’s my question: what if the Indian government had allowed Bofors to set up manufacturing facilities in India under a wholly-owned subsidiary governed by the Indian Companies Act? Under a condition that the CEO and other top managers had to be Indian residents? Under another condition that Indian citizens or residents had to be in majority on the board of directors? Would it not have been easier to bring the accused to justice? Under Indian laws and courts? And if any manufacturer had smuggled in a “snooping software bug” into the machines (another oft-quoted fear of foreign equipment), would it not be easier to kill that bug if it were inserted in Bengaluru than, say, Sweden? And this could happen without jeopardizing the supply of these crucial weapons for India’s security forces, ie the guns and helicopters would continue to remain on the assembly lines, even as the wrong-doers are punished.     

Push for FDI in Defence Sector

So why does India not allow majority foreign direct investment (FDI) in defence manufacturing?

Commerce and Industry has been urging 74 percent FDI. Although the Modi government did increase the earlier 26% cap to 49%, it has hardly moved the needle – do remember that the 26% cap had proved to be exceptionally timid, bringing in only $4.12 million (not billion) in FDI since the ‘relaxation’ was made in 2001. That is tragically minuscule for the world’s largest importer of arms!

India purchases about $40 billion worth of weapons every year. It has a Rs 640,000 cr ($103 billion) defence modernization programme. This is sufficient inducement for foreigners to produce in India. Even if they do not part with the latest technology, they will create jobs that would otherwise have flown out to France or England or America or Russia. Indians will also develop skills and create a strong manufacturing base for exports.

So I simply don’t get it – we prefer to spend $ 100 bn in scarce hard currency to import equipment, when we could easily create a policy environment where $ 25-40 bn could flow in as foreign investments, creating jobs in India, allowing us to modernize our security apparatus by paying in INR, and earning several billion dollars “extra” via export of equipment manufactured here? It’s a win-win-win-win, ie four wins from a single decision!

The East India Company Syndrome

For our xenophobic comrades who continue to suffer from the “East India Company syndrome”, they must learn from our automobile industry. We have allowed one hundred percent FDI, and foreign manufacturers have come swarming in, but Indian companies too have flourished.Bajaj Auto and Hero eagerly compete with Honda and Suzuki; Tata Motors has gone out and acquired Jaguar, and Mahindra is making a global impact in tractors and SUVs. We are now exporting cars and all kinds of vehicles to tough Western and other global markets.

This is exactly how China leverages its buying power, whether to secure Boeing’s manufacturing facility or to get the world’s railway majors to part with technology. It is now time for us to bury the East India Company ghost, and convert a life-sucking expenditure into a win-all investment.