India is the largest importer of defence related equipment in the world. Of its annual spend of over $50 Billion on arms, over 50% of that is spent on imports. The largest exporter of arms, by a large margin, is the US, which also has many of the largest defence companies in the world. In the top 5 companies, only BAE Systems of the UK is not American. All 10 of the top defence companies in the world belong to the Western world-the US or EU.

India's initial plan of getting companies that sell to India to be subject to an offset policy was a good attempt. So if a company supplied $1 Billion of equipment to India, it would have to procure 30% of that equipment locally. The hope was that this would give enough of a boost to local manufacturers so that they could then expand and hire people locally. However, if India imports say $25 Billion of equipment annually, then theoretically there must be $7.5 Billion worth of sourcing to be done locally. The entire supplier base in India would not be enough to meet that demand. The list of qualified suppliers that would be eligible is small and many of these are small shops that have been surviving on doing $10-20 Million of business for decades, with little growth in capability nor ability to invest.

FDI in the defence industry was initially capped at 26% and then increased to 49%. There were no takers under those conditions. Western firms were wary of transferring their technology to Indian companies where they did not have control. It was clear that the policy was failing and change was needed. Given the Modi government's usual attempt at incremental change, I was expecting the next logical increment to 51%. However, the government surprised all of us with a bold move going all the way to 100% ownership in defence. This makes total sense and will finally incentivize Western companies to set up wholly owned subsidiaries in India to supply to the Indian market. This move should give a big boost to the "Make in India" ambitions of the government.

Some critics have pointed out that India is "selling out" to Western interests by this move. Perhaps there is some truth to that. Or perhaps this will hasten India's alignment to the West in what appears to be an increasingly necessary strategic partnership to safeguard its place in Asia and at the global table. Only last week China moved to block India's entry into the Nuclear Suppliers Group (NSG). China would block India's entry into any key global roles, including the expansion of the UN Security Council at some point in the future. As China moves aggressively to dominate East Asia, India needs to upgrade its defence equipment and this move should facilitate its ability to buy the latest defence equipment from the US and EU while simultaneously creating high quality jobs in India. Overall, the right move for India.