Opening up of India's defence sector significant, say experts

Experts say changes to investment rules will attract foreign defence manufacturers

Indian Prime Minister Narendra Modi speaking at the Los Pinos presidential palace in Mexico City on June 8.
Indian Prime Minister Narendra Modi speaking at the Los Pinos presidential palace in Mexico City on June 8.PHOTO: AFP

The Modi government's decision to open up the defence sector to attract more foreign investment, part of a sweeping liberalisation of investment rules announced on Monday, is significant, say experts.

It will make the world's largest importer of arms a far more attractive manufacturing destination for foreign defence companies.

Nine sectors which include - apart from defence - aviation, pharmaceuticals and single-brand retail were opened up in a major reform push to create jobs and spur growth in the country.

Prime Minister Narendra Modi, calling the changes "radical", said they would make India, already one of the world's fastest-growing major economies, also the most open in the world.

The cap for investment in defence - an important sector for India, which is trying to modernise its military and bolster its defences against rivals Pakistan and China - was increased from 49 per cent to 100 per cent, subject to government approval in cases resulting in access to modern technology in the country.

Defence companies welcomed the changes, with Airbus Group India calling it a "pragmatic" move while experts noted that the government still would have to do more, like speeding up the procurement process.

"It is a significant step. It makes it easier for foreign companies and the Indian government to consider FDI (foreign direct investment) proposals. But it doesn't automatically translate into an increase in manufacturing... (so) more will have to be done," said Mr Amit Cowshish, a former Ministry of Defence adviser who is now with the Institute for Defence Studies and Analyses.

Mr Mohan Guruswamy of the Delhi-based Forum for Security Issues said India desperately needs defence investment.

"India needs to spend US$250 billion (S$336 billion) over the next decade for military modernisation. It can't find that much money on its own," he said.

Mr Modi won a massive majority in the 2014 election on a promise to create jobs and rev up growth. But he has struggled to bring about big-bang reforms due to a lack of majority in the Upper House where major reforms like the Goods and Services Tax remain stuck.

The government also eased a rule mandating that foreign retailers source 30 per cent of their supplies domestically if their products are "cutting-edge technology".

The relaxation paves the way for Apple to expand its operations in the country.

Some see the reform push, coming after Mr Modi opened up sectors such as defence and insurance last November, as aimed at reassuring foreign investors, unnerved by Reserve Bank of India governor Raghuram Rajan's announcement that he would step down when his term ends in September.

Experts said that the changes would reassure investors.

"The bold FDI liberalisation steps would definitely encourage investors and boost confidence. But opening the door to investment is only one step in a series of steps, namely friendlier taxation, efficient infrastructure and adequate labour skills, to name a few," said Mr Rajeev Malik, a Singapore-based senior economist at CLSA, a brokerage and investment company.

However, the government drew flak from the Swadeshi Jagran Manch, an affiliate of the Rashtriya Swayamsevak Sangh, the ideological backbone of Mr Modi's Bharatiya Janata Party, for betraying local businesses by making it easier for foreign firms to operate in India.

A version of this article appeared in the print edition of The Straits Times on June 22, 2016, with the headline 'Opening up of India's defence sector 'significant''. Print Edition | Subscribe