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:
- 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 : Globally competitive environment.
- Reduction in imports
- Greater reliability of supplies in war.
- Better spares support
- Insulation from Embargoes
Way Forward:
- National Defence Industrial Policy – genuine requirement – to deal with all relevant issues pertaining to defence design, development and production.
- Enhance FDI Cap.
- 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: offset the initial foreign exchange outflow.
- Explore Strategic Partnership Model – investing in R & D.
- Build Military-Industrial Complex
- Extend Assistance to Domestic Private Sector
- Encourage Multi-Nation Consortiums. 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.
UPSC CSE Notes 