ENHANCEMENT IN FDI IN DEFENCE MANUFACTURING

On May 16, 2020, Nirmala Sitharaman, Minister of Finance announced that global companies can now invest up to 74 per cent in the country’s defence manufacturing sector as against the existing limit of 49 per cent for foreign direct investment (FDI) under the automatic route i.e. without the need for prior approval by the Government. The announcement came as part of reforms undertaken by Prime Minister Narendra Modi’s government in an attempt to revive the Indian economy that has been shattered by the COVID-19 pandemic. The Minister said that India will stop importing weapons that can be made in the country. “We will notify a list of weapons and platforms for ban on their imports and fix deadlines to do it,” she said.

In May 2001, the Indian Defence Industry which was reserved for the public sector, was opened up for participation by the private sector in India, permitting investments up to 26 per cent under the automatic route and up to 100 per cent with prior sanction by the government. However, this provision was subject to the potential investor being eligible for grant of license. Thereafter, in June 2016, the Department of Industrial Policy and Promotion (DIPP) that had been established in 1995, notified review of and change in policy on FDI in various sectors of the industry in India which also included the defence manufacturing sector. DIPP was reconstituted in the year 2000 with the merger of the Department of Industrial Development and was renamed as the Department for Promotion of Industry and Internal Trade (DPIIT) and was entrusted with a mandate to deal with matters related to start-ups and facilitating ease of doing business among others. As per the new guidelines, FDI of up to 100 per cent continues to be permitted as before especially where access to modern technology from foreign sources would be required, with prior approval of the Government. However, in other cases, in 2016, the FDI limit was increased from 26 to 49 per cent through the automatic route that did not entail prior Government sanction. The aim of this revision in FDI was to attract modern technology in the Indian defence manufacturing sector. India issues defence industrial licenses for the manufacture within the country, of military hardware that includes tanks, military aircraft, spacecraft and its components, unmanned aerial vehicles, surface-to-surface, surface-to-air as well as air-to-air missiles and warships. This move by the Government to enhance the limit of FDI to 49 per cent did register notable success as since then, the defence manufacturing industry in India has attracted investments of over ` 18.34 billion until December last year. DIPP had also drafted a Standard Operating Procedure (SOP) for the scrutiny by Administrative Ministries of proposals for FDI in the defence manufacturing sector.

India has always been largely dependent on procuring military hardware from foreign sources. During the cold war era and the existence of a bipolar world, India was importing most of the military hardware required by the Indian Armed Forces from the

Union of Soviet Socialist Republics (USSR) or the Soviet Union to which it was politically tethered. However, with the breakup of the Soviet Union and the consequent emergence of a uni-polar world, though India continues the existing trade relationship with Russia, the nation has been able to diversify the sources of procurement of military hardware. In the last over a decade, the Indian Armed forces have received weapon systems and combat platforms from the United States (US), Europe and Israel.

But more importantly, the Government has embarked on a major exercise to indigenise the design, development and production of military hardware. The Government has introduced the ‘Strategic Partnership (SP) Model which aims at creating long term strategic partnerships with the Indian defence majors through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfer to set up domestic manufacturing infrastructure and supply chains. In March, 2019, the Government of India also notified a Policy for indigenisation of components and spares used in weapon systems and combat platforms with the objective of creating an ecosystem in the industry which then will be able to indigenise the imported components including alloys, special materials and sub-assemblies for defence equipment and platforms manufactured in India. In addition, the Government of India has embarked upon projects to establish two defence industrial corridors to serve as an engine for economic development and growth of the defence industrial base in the country. The first defence industrial corridors will span across Chennai, Hosur, Coimbatore, Salem and Tiruchirappalli in Tamil Nadu while the second will cover Aligarh, Agra, Jhansi, Kanpur, Chitrakoot and Lucknow in Uttar Pradesh.

In the recently announced economic stimulus, the Government has again focused on the defence industry to boost the Make in India campaign. The Government will notify a list of weapon systems or combat platforms whose imports will be banned and this list will be increased every year. Those items banned for imports can only be purchased from within the country.