Overview on FDI in Defence

It was in post-independent India that the notion of self-reliance with integrity took its roots. An individual or a community is said to be self-reliant when they meet their essential needs in a dignified and sustainable manner, reducing their vulnerability and dependence on external assistance. While India has opened foreign investment in the defence sector, it is taking equal measures to initiate ‘self-sustenance’ through government campaigns. One such case is allowing Foreign Direct Investment (FDI) in the Indian Defence sector with a view to bringing about self-reliance with integrity. 

Importance of Self Reliance – FDI in Defence

Investment in the defence manufacturing sector of India was earlier limited to public companies, and it was opened up in 2001. This initiative allows 100% domestic and private sector participation and 26% in FDI. In the initial stages, foreign investments were allowed only through the government. In addition, both domestic and foreign firms came under compulsory industrial licensing.

However, the Indian government, envisioning the importance of self-reliance, revised its FDI rules in defence on 17th September 2020. Though foreign ownership of 100% was allowed in the FDI sector, around 74% ownership was allowed under the automatic route. In addition, the single largest Indian ownership of equity was also removed. A three year lock-in period on equity transfer was done. 

However, as per the guidelines of the Ministry of Defence, FDI in defence is subject to security clearance by the Ministry of Home Affairs. Easing FDI norms in the defence sector will lead to self-reliance with integrity in production, enhance ease of doing business and lead to a growth in income, investment and employment.

Benefits of Self Reliance – FDI in Defence

The benefits of self-reliance are envisioned with an increase in FDI in the defence sector. The foremost is the production of quality equipment. Coupled with an improvement in infrastructure facilities, advanced expertise in technical, and better production facilities, efficiency and productivity will be enhanced, leading to a drop in production cost.

Further, increased production would lead to an expansion of employment opportunities both in the organised as well as unorganised sectors. An increased FDI would see an increase in both the quality and volume of international trade. Moreover, an influx of foreign capital would lead to enhanced tax revenues, paving the way for economic improvement.

A higher FDI resulting in better infrastructure and enhanced productivity would result in a reduction of ammunition and other equipment stock levels at different levels of the Armed Forces.

More importantly, public sector enterprises, such as DRDO-Defence Research and Development Organisation, OFB-Ordnance Factory Boards, and Defence PSUs, would face increased performance pressure, which may lead to an improvement in their performance due to the benefits of self-reliance. Another benefit of an increase in FDI would be a reduction in imports; it would lead to greater transparency in the sector and pave the way for a diminished role for middlemen.

Disadvantages of Increased FDI in Defence

Grappling with terrorism as well as other domestic violence issues like that of Naxals, an increase in FDI for the items included in the Defence Product List would potentially make our security vulnerable. Moreover, an increase in FDI and the resultant formation of Joint Ventures (JVs) would negatively impact domestic manufacturers. 

Foreign investors may utilise domestic resources without sharing adequate benefits with the host country. Unrestricted or increased FDI in the defence sector might lead to a monopoly in the making of high-tech weapons in the absence of adequate control by the Indian government. In such a scenario, there comes an emergence of lobbies and cartels collaborating to raise the defence expenditure.

Self Realisation with Integrity

‘Atmanirbhar Bharat Abhiyan’/‘Make in India’/‘Self-reliant India campaign’ is an initiative spearheaded by Hon’ble PM Shri. Narendra Modi is a major step toward self-reliance with integrity. 

The aim of this campaign is to make India self-reliant and independent in all senses. The five pillars of Atma Nirbhar Bharat are: 

1. Economy
2. Infrastructure
3. System
4. Vibrant Demography
5. Demand

The Indian government made several bold reforms, such as,

• Supply chain reforms for agriculture
• Simple & clear laws
• Rational tax systems
• Strong financial system
• Capable human resource

The ‘Make in India’ concept has been the most rewarding realisation for the Indian economy- self-realising and focusing on possibilities to create future capabilities.

India still hasn’t evolved into a hub for manufacturing hi-tech arm weapons and equipment. Currently, the country is purchasing many critical weapons and equipment manufactured in foreign countries. If the same defence weapons and equipment get manufactured in the country, it will lead to increased protection from the partial or one-sided imposition of embargoes by foreign enterprises.

Of late, the Indian government’s constructive and encouraging policies have provided a fillip to a favourable business environment and have ensured that foreign capital keeps flowing into the country. The focus on science and technology has been beneficial to the nation’s developing economy. The use of the latest technology and encouraging defence policies have favoured India. 

India, moving on the right pathway to self-reliance, has finally managed to utilise the opportunity of the ultimate aim to export the defence equipment produced in India – export of ‘Brahmos’ missiles to Vietnam!