Government to raise FDI limit in Defence Production from 49% to 74 % : A Study

Recently, Indian Government has decided to increase Foreign Direct Investment in Defence Production from 49% to 74% via the automatic route and decided to promote indigenisation of defence production under its 'Make In India' initiative.

Unveiling the measures, Govt of India has also decided to put out a list of weapons and platforms that can only be purchased from Domestic Defence Industries. This list is entitled to increase every year by consultation with armed forces.

Finance Minister also announced the corporatisation of ordnance factories boards which has potential to produce good standards of Defence products but are not able to do so. She also added corporatisation does not mean privatisation. Govt has taken decision only to increase the production efficiency of 60 ordnance factories so that they can be traded globally and hence will put forward the 'MAKE in INDIA' initiative. The focus will also be emphasized on the procurement of spares which are made in India.

This initiatives are taken by the govt of India to cut down the massive defence import budget which is increasing in last few years. As of 2019, India ranked third largest military spender across the World after the USA and China.

Prime Minister Narendra Modi in inauguration of 11th Defence expo held in February in Lucknow set a target of $5 billion from India's Defence Exports in the coming 5 years. He had invited private defence production companies to invest in India which would give handsome returns for the investments and will also make the Asia's third largest economy self reliant in defence production.

India has recently inaugurated two defence corridors also, one in South in Tamil Nadu and one in North in Uttar Pradesh to boost the flagship 'MAKE IN INDIA' that would attract FDI as well as will lead to the employment generation across the country.

Some points to be considered:

• Apart from FDI limit, the other measures are not very beneficial. Corporatisation of Ordnance Factory Board may help bring in some efficiency, but privatisation would have been great reform. Because Private sector is struggling in defence because of the OFB and PSU gets government preference.
• Raise in FDI limit will help only if it is backed by a good procurement policy. It is to be taken into consideration that Modi Govt has increased FDI limit to 49% in 2016 via automatic route and also allowed 100% on a case to case basis. But FDI did not increase. In 2026-17 India failed to attract any FDI. In 2017-18, it received $0.01 million, and in 2018-19 it received $2.18 million.
• Along With FDI India failed to attract substantial private sector investments.

Reasons are:

• Delays in decisions by Govt
• Placing Piecemeal orders
• Cancellation of tenders
• Unreasonable qualitative requirements by armed forces
• Disappointment of private Companies in defence production because of lack of government support.
• They always lacked orders or small orders.
• Example is K-9 Vajra Self Propelled Howitzer being manufactured by Larsen and Toubro whose factory is in Gujarat. In the absence of new orders production of line will go idle after the last of 100 guns that are expected to be of 250 guns.
• Tonbo imaging currently wrote a letter to PM Modi lamenting cancellation of orders and delays in making payments.
• These policies hurts DPSUs also.
• Private sector is going to thrive only if govt makes firm orders and places orders in quantities that are viable to produce for a private sector industries.
• Also, Private sector is unable to compete with PSUs as these organisations are setup by the funds raised by the public sector. Private sector has to consider cost of money, investment and profit making also.
• Lack of level playing field will continue to hinder private investments in defence sector always.
• Indian armed forces over the years also returned the money to Govt due to delayed procurement. Govt should approve the long standing demand of non-lapsing funds.
• Project wise allocation of funds will help in the utilisation of non-lapsing funds by making a separate account for each.
• It will give access to the funds readily when a deal will be signed.
• This type of system will also not face funds crunch which is currently being faced by the Modi Government.
• Opening up of space sector for private industries and use of ISRO facilities is a good move and it will help the private industries to fulfill the domestic and global demands for satellites and space launchers.
• Export of produced weapons is also to be done at a speedy rate so as to increase the revenue of the country.