India’s defence industry received foreign direct investment (FDI) of a meagre USD 2.18 million during 2018-19. In 2014-15, 2015-16, and 2017-18, the sector attracted FDI worth USD 0.08 million, USD 0.10 million and USD 0.01 million, respectively, according to data given by Commerce and Industry Minister in a written reply in the Lok Sabha.

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Importance of FDI in defence sector lies in Quality Products, Boost to Economy, Employment Opportunities, Increase in International Trade, Positive Performance Pressure on Public Sector Enterprises, Transparency and reduced corruption and Reduction of Reserves.

Evolution of FDI in defence sector of India:

• The Defence Sector in India, being a strategic sector, was traditionally reserved for the Public Sector till 1991.
• Defence Public Sector Undertakings (Defence PSUs) and Ordnance Factory Board (OFB) monopolised defence products manufacturing while R&D was the exclusive turf of DRDO.
• The concept of FDI in general was introduced in India in 1991 with the opening of the Indian economy.
• However, the Defence Sector was opened up 100% in May 2001 for Indian Private Sector participation with FDI permissible up to 26%, both subject to licensing.
• In August 2014, the Department of Industrial Policy and Promotion (DIPP) raised the limit up to 49% through Government route and above 49% through Cabinet Committee on Security (CCS), on case-to-case basis.
• The Government formulated a revised “Consolidated FDI Policy” in 2016, where the policy permitted FDI cap in defence, through automatic route up to 49% and above 49% under Government route on case to case basis, wherever it is likely to result in access to modern and “state-of-the-art” technology in the country.
• The Government further raised FDI cap to 100% on again in 2016. The phrase state-of-the-art was dropped for FDI above 49%. The CCS approval was no more required.
• However, the process of approval itself will include the Ministry of Defence (MoD) and the Ministry of Home Affairs (MHA) which will consider issues related to defence of the nation, internal security and every other matter which relates to the national security.
• The requirement of single largest Indian ownership of 51% of equity has also been removed. A lock-in period of three years on equity transfer has been done away with in FDI for defence.

Implications of FDI in Defence on Self-Reliance and Indigenisation:

• Build industrial capability and ecosystem: Utilise FDI as a route to attract much needed foreign capital to boost building of the indigenous defence industrial manufacturing capability.
• Induction of modern technology: Enhanced FDI, that enables majority stake holding by foreign company, represents not merely acquisition of funds but also realistic possibilities of access to coveted modern technologies for weapons and equipment. The weapons and equipment so manufactured, on becoming globally competitive, in turn, would attract more FDI and better technology and the progressive cycle goes on.
• Reduction in imports: FDI in defence is likely to substantially improve the country’s capacity to manufacture defence weapons and equipment locally and meet both qualitative and quantitative requirements of the Armed Forces.
• Greater reliability of supplies in war.
• Better spares support
• Insulation from Embargoes: Currently, India procures most of the critical weapons systems and equipment that are either manufactured or both manufactured and integrated abroad. When the same weapons systems and equipment are manufactured in the country, indigenous production will tend to insulate the country from unilateral imposition of embargoes by whimsical foreign suppliers.

Way Forward:

• National Defence Industrial Policy: There is a genuine requirement to articulate National Defence Industrial Policy which should deal with all relevant issues pertaining to defence design, development and production.
• Enhance FDI Cap: It is strongly recommended to permit enhanced FDI, above 49 percent through Government route, in deserving cases without being overly protective about the Defence Public Sector Enterprises. Further liberalised FDI Policy in the Defence Sector is the need of the hour.
• Minimise Procedural Delays: Government should ensure that there is transparency, evident decisiveness and no room for bureaucratic/procedural delays and corruption.
• Enhance interaction between Armed Forces and Industry: The Armed Forces need to actively interact with the industry to enable focus on the technology desired in the future weapons systems and equipment.
• Promote Export of Defence Products: Exports should be encouraged to ensure economic viability of an enterprise as also to earn foreign exchange to offset the initial foreign exchange outflow.
• Explore Strategic Partnership Model: The partnership would essentially provide for long-terms needs of the Armed Forces. This route encourages the Industry to invest in Research and Development.
• Build Military-Industrial Complex: Suitable incentives, in terms of provision of funds for research, tax relief based on the investment made in research projects, provision of land on concessional rates to defence vendors, are required to be extended to encourage investment by Private Industry in R&D.
• Extend Assistance to Domestic Private Sector: India’s Private Sector needs hand holding, in terms of technology to be able to graduate to manufacturing of complex modern weapons systems and military equipment by collaboration with foreign technology majors.
• Encourage Multi-Nation Consortiums: India should exploit its favourable geopolitical location and aspire to be a regional hub for global outsourcing of weapons and equipment. BrahMos Cruise Missile is an excellent example of high-grade output of consortium approach.

Conclusion:

But at the same time we should realize that FDI is not a magic wand which can solve all the problems of the defence sector. So Increase in the FDI Cap should be complemented by other defence sector reforms such as ensuring enabling environment for investment, solving land acquisition issues etc.