Recently, the Union Cabinet gave its consent for a new Foreign Direct Investment (FDI) policy in the defence sector. The upgraded policy allows for a rise in FDI through automatic approval from 49% to 74%. This pertains to restrictions that previously allowed the defence industry to accept FDI up to 49% under the automatic route, with any increase above this percentage requiring government intervention. However, the current policy includes a ‘National Security’ clause which has been proposed by the Ministry of Commerce and Industry.
National Security Clause
The new FDI policy will scrutinize foreign investments in the defence sector on the basis of National Security. The government reserves the right to review any foreign investment in the defence sector that may have implications for national security.
Strengthening Indigenous Manufacturing
Through this liberalized FDI policy, the government is encouraging foreign entities to establish manufacturing units in India, especially within the defence sector. The goal is to use the defence sector as a catalyst for boosting overall manufacturing in the country, working towards achieving a turnover of Rs 1.75 lakh crore, including exports worth Rs 35,000 crore, by 2025. As of 2019, the defence industry, along with the aerospace and shipbuilding industry, was estimated to be worth Rs. 80,000 crore, of which the share of Public Sector Units (PSUs) was nearly 80%.
Defence Production and Export Promotion Policy 2020 (DPEPP 2020)
To further this objective, the government has proposed the Defence Production and Export Promotion Policy 2020 (DPEPP 2020). This aims to provide a guiding document to enhance defence production capabilities of the country for self-reliance and exports.
Negative Imports List and Defence Industrial Corridors
In addition to DPEPP 2020, the government has introduced a negative imports list for defence equipment and dedicated budget for capital acquisition from the domestic industry. The negative imports list includes weapons that will not be imported and can instead be purchased domestically, thus curbing the defence import bill. Furthermore, two defence industrial corridors have been inaugurated in Tamil Nadu and Uttar Pradesh to foster the ‘Make in India’ programme, attracting further investment and encouraging employment generation.
Foreign Direct Investment (FDI)
FDI is an investment made by an individual or firm in one country into business interests located elsewhere. It differs from Foreign Portfolio Investment (FPI) where the foreign entity simply buys equity shares of a company without gaining control over the business. There are two routes through which India receives FDI: the Automatic Route, which doesn’t require prior government or RBI approval, and the Government route, which requires government approval facilitated by the Foreign Investment Facilitation Portal (FIFP), administered by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
Impacts of the New FDI Policy
The new FDI policy has significant potential to reduce India’s dependency on imports in the defence sector while boosting domestic manufacturing. It aims to provide employment and business opportunities to Indian businesses and enhance self-dependency.
Last Modified: February 9, 2024