The recent decision to liberalize Foreign Direct Investment (FDI) in the defense sector marks a significant shift in India’s economic and strategic landscape. This move is poised to bring about both short and long-term impacts on the Indian defense industry and economy. In the short run, increased FDI is expected to inject much-needed capital into the defense sector, fostering technological advancements, boosting production capabilities, and enhancing the country’s defense infrastructure. This influx of foreign investment may also stimulate job creation and skill development within the domestic workforce. Moreover, in the long run, liberalizing FDI can potentially bolster India’s self-reliance in defense production by facilitating technology transfers and promoting collaborations between domestic and foreign firms. Additionally, the competitive environment spurred by increased foreign participation could drive innovation and efficiency, positioning India as a global player in the defense market and contributing to overall economic growth and stability.
Tag: Investment models.
Decoding the Question:
- In intro, try to write about India’s FDI in defence sector (recent policy changes)
- In Body,
- The first part of the answer discusses the short and long-term impact of the new FDI policy on the Indian defence sector.
- Try to conclude the answer as per context of the question.
Answer:
In the recent policy change of the Government of India, the Ministry of Finance has allowed or increased the FDI limit from 49% to 74% with automatic approval. This new policy shift is in accordance with the Make in India policy. The Indian defence industry has been very vibrant and can be very competitive if it gets some critical technologies. For making India a defence manufacturing hub and making India “ATMA NIRBHAR BHARAT” or “SELF RELIANT INDIA” in defence equipment.
Evolution of FDI in the Defence Sector:
- 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.
Short term impact:
- Revive Economy: The Indian economy is facing slow down and fresh investment opportunities will generate employment and revive India’s economic growth by increasing productions in Micro, Small and Medium Industries (MSME’s)
- Fulfil Immediate Requirement: As tension with China has increased, the immediate need for some of the equipment can be fulfilled from foreign defence corporations. Most corporations are keen to invest in the Indian defence industry.
- Positive Sentiments: With an increased limit of FDI will give positive signs in the pandemic affected world economy and enhance the confidence of investors to invest in various segments of the defence sector. It will attract newer domestic investors.
- Increases Jobs: Slowing economy and jobless growth need economic growth with jobs. The defence industry has immense potential to generate a number of direct and indirect jobs.
- Reduced Import: It will have both short term and long-term impact as increased investment will increase indigenous productions and in long term it will reduce India’s import dependency and forex reserves as well.
- Boost Morale of Armed Forces: Indigenous manufacturing will boost armed forces as modernisation of Indian armed forces may be done in a timely and faster manner, with indigenous systems.
- Start-ups: Easing FDI norms will also lead to thrust to setting up newer start-ups in defence manufacturing. This will also help in making most innovative defence products for Indian armed forces and for exports.
Long Term Impacts:
- Create Defense Ecosystem: Increased FDI limit will make foreign investors build a proper defence ecosystem In India. If a proper ecosystem is developed in the defence ecosystem it will help in building the state of the technologies.
- Increasing defence export: In the long term, India will become a well-established defence manufacturer, which will help in increasing defence export. India has set a target of export of rupees 35 thousand Crore or $5 billion dollars by 2025.
- Strategy in Indian Ocean Region: Exporting defence equipment to friendly countries especially South-East Asian countries. The government of India has been in talks with the export of the BRAHMOS missile system to the Philippines, and recently Malaysia showed interest in Tejas LCA.
- Making India ATMA NIRBHAR: Government has announced last year a policy of making India ATMA NIRBHAR in the defence sector. The Ministry of Defense has declared a list of import bans of some of the defence products.
- Future programs: India is still lacking in critical technology like jet engine technology. After spending thousands of Crore rupees, India’s Kaveri Jet engine programme is still not fully developed. One’s foreign companies start coming to India. The Kaveri engine programme will get much-needed thrust.
- Strengthen Indian rupee: Every year huge amount of dollars is spent on defence items imports but increased FDI limit will help in saving foreign currencies and help in keeping rupee value stable.
- Competitive atmosphere: By bringing new private players in Indian defence industry will create a competitive environment which will further improve quality, research, and development and cheap but most advanced products can be produced within India.
Way Forward:
- 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.
- 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.
- 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.
- 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-term needs of the Armed Forces. This route encourages the Industry to invest in Research and Development.
- 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.
Thus, recent initiatives in India’s defence sector will give expected results in upcoming times. The Indian Government has been looking forward to increasing exports and building a sustainable and matured defence sector and the related ecosystem. The constant policy support and political support will make India self-reliant in defence industries.
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