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Will India smash FDI ceiling on defence?



Author: Pravakar Sahoo, Delhi University

In a bid to invite foreign investment, increase domestic production and modernise India’s defence industry, the new government has initiated cabinet note to raise the industry’s foreign direct investment (FDI) ceiling from 26 to 100 per cent. The FDI ceiling for defence will be increased in graded steps to incentivise technology transfer — it will be raised to 49 per cent in cases where there is no technology transfer, up to 74 per cent in cases where a technology transfer is being proposed, and there will be a no-cap policy for cases which bring in state-of-the-art technology.

Military personnel successively test an Akash missile in very low altitude in Balasore, Orissa, India, 18 June 2014. India is looking to increase its FDI ceiling for the defence industry. (Photo: AAP)

This will help India in leveraging critical technologies to develop domestic capabilities in the Indian defence industry and thereby create jobs in the country. This might be a game changer in defence production in India, which has historically been dominated by the public sector and is in need of investment and modernisation.

India is aiming to strengthen its global strategic presence and is eyeing a seat on the UN Security Council. External and internal security concerns further demand increasing defence expenditure to modernise India’s defence industry. However, given the fiscal constraints that the country is facing, this requires an increase in capital expenditure. India currently imports 70 per cent of its defence equipment. If India is to reach its target of meeting 70 per cent of its defence needs domestically, it needs top-end technologies and a vibrant manufacturing base. This is possible with increased FDI.

Between 2001 and 2011 India’s defence expenditure increased 64 per cent in real terms, but not in line with defence requirements. In the 2014–15 interim budget, the Indian government allocated US$37.15 billion for defence with 60 per cent (roughly $22.75 billion) revenue and 40 per cent capital component. Though 2014–15 budgeted a 9.98 per cent increase over the preceding year, the defence budget as a share of GDP went down marginally to 1.7 from 1.8 per cent in 2013–14. This signals that defence expenditure, while having grown in absolute numbers, has not grown as fast as the overall economy.

Realising the sector’s needs, the Indian government allowed private participation and FDI up to 26 per cent in 2001. This has attracted foreign original equipment manufacturers (OEMs) to India, but there is still only a small amount of foreign capital and technology flowing into the country.

Indian defence is still dominated by the public sector. Most contracts are given to Defence Public Sector Units, even if a private company is better placed in terms of infrastructure and knowledge to utilise the technology. Procedural issues also constrain private sector participation. For instance, the private sector is not made aware of the needs of the armed forces in advance. Also, the public sector is seen as best representing national pride.

It is hoped that raising the FDI cap will lead to joint ventures between the Indian private sector and OEMs that generate technology consistent with international standards. The Indian government should ensure OEMs receive the necessary approval from their host countries to share technology with Indian partners. The Indian government should also prioritise joint ventures where more than 50 per cent of the products can be manufactured in the country to develop the Indian defence manufacturing base. This will help Indian partners develop the necessary infrastructure and get required certifications. OEMs should further be encouraged to share technology that is consistent with India’s defence objectives as outlined in the 15 year ‘Indian Armed Forces Long-Term Integrated Perspective Plan’.

Also, the Indian government’s enforcement of an export commitment for joint ventures could help the Indian defence industry integrate into the global market and ensure international standards in manufacturing.

Joint ventures’ employment of Indian nationals at operational and supervisory levels would also be an important part of this integration process.

Allowing increased FDI in defence equipment manufacturing is a positive step for India. It will provide the Indian private sector with a level playing field from which to compete with the best from both the public sector and OEMs. In the long run, increasing FDI will help achieve India’s objective of a self-reliant defence industry that is less dependent on imports.

Pravakar Sahoo is an Associate Professor at the Institute of Economic Growth, Delhi University.

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Will India smash FDI ceiling on defence?


ASEAN weathering the COVID-19 typhoon



Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.


Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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