Foreign Direct Investment (FDI) in Defence Sector in India

Posted by Prof. Dr. Dinesh Mahajan On 04/07/2023 12:07:28

Introduction: FDI may be defined as an investment made by a firm or individual in one country into a business situated in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company. The defence sector in India is assuming much importance due to the favourable policy of the Government of India. The FDI policy in the defence sector permits the FDI via automatic approval to grow from 49% to 74%. FDI in the defence manufacturing sector appeared to scrutinise the national security clause ground. The Indian government reserves the review rights for any foreign investment in the defence manufacturing sector that inspires national security. It is required in the national interest.

Importance of FDI in the Defence Sector: The relevance of FDI in the defence sector for a country like India is significant. India depends on imports for more than 70 per cent of its defence requirements. The country spends around 3 per cent of its GDP and 25 per cent of its annual budget on defence. Yet India could only attract a handful of foreign companies to establish manufacturing plants in India in association with an Indian firm. The government has introduced a series of booster schemes and measures that have resulted in a steady flow of capital and investment opportunities in the sector. The inflow of FDI is far better than debt. It will push for growth and development. It intends to transform India into one of the manufacturers from one of the largest importers. It will bring technological advancement to India. It will make the economy widely open. The increased flow of funds from a foreign source leads to more employment opportunities for the local population. It also means that taxes and other revenues will flow back to the local economy.

Limitations of FDI in the Defence Sector: Defence-related FDI coming into India amounted to just US$10 million between April and September 2020. India has lagged behind other countries in attracting foreign investment, even with its significant defence market. Around 90 per cent of Indian defence imports come from Israel, Russia, France and the United States. Indian investors may not comply with foreign defence manufacturers. Most nations would know the defence manufacturing limits of India. It is going to kill the domestic sector and Indian defence manufacturing sector-related organizations such as DRDO are going to suffer major setbacks. While the transfer of technology from foreign sources may increase, the advantages of having homemade products will decrease.

Government Initiatives: According to government data, India has around 194 defence start-ups building innovative tech solutions. The government has set a target of Rs. 1.75 lakh crores of defence production by 2025, which includes the export of Rs. 35,000 crores. The Budget outlay for Financial Year 2023 has been fixed at Rs. 5.3 trillion, about a 10 per cent increase over last year. The government has reserved production of certain arms and ammunition for making in India and other items are open for FDI in a big way.

Conclusion: Any economy cannot be self-sufficient, and it is not possible to battle against problems like terrorism just by risking lives. Technology thus becomes an important tool in covering such hazards. The harsh reality is that our defence sector needs a good overhaul, and our government needs to allocate sufficient budgets for the production of defence materials. The initiatives taken by Govt. have brought desired results. Technology transfer has been a major achievement by the Govt. Many foreign companies are coming to India for joint production in the defence sector.

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