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Make in India: 74% FDI in Defence manufacturing

Through a virtual-conference, ‘Atmanirbhar Bharat Defence Industry Outreach Webinar’ PM Narendra Modi addressed the importance of self-reliance in the Defence sector. The Prime Minister announced on August 27 that 74% Foreign Direct Investment (FDI) will now be allowed in the defence sector through the automatic route.

Chief of Defence Staff General Bipin Rawat said: “We do have large demands for ammunition. We are asking for ten years’ requirement for ammunition…. We want to promote defence exports. Once the government meets its requirement then the excess can be exported.”

The CDS informed that AK 203 will be the mainstay of rifles for Indian Defence Forces, and these will be manufactured in India through a joint venture. As for the Naval Utility Helicopter, he said all industries will be given equal opportunity to participate in the contract.

In May, Finance Minister Nirmala Sithraman on Saturday announced that the FDI limit in Defence production was being raised to 74% from 49% for FDI through the automatic route as part of reforms in the defence sector to boost self-reliance.

Earlier this year, CDS Gen Rawat told ANI, “We have been working together for adopting the whole-of-Government approach. All issues that are facilitating indigenisation in military weaponry, ammunition and equipment have been coordinated. We are happy to see the announcements because these will ensure timely implementation,”

Source: ANI

Key takeaways from the PM’s address

  1. “We aim to increase defence manufacturing in India and make the nation a reliable weapon supplier to friendly nations.”
  2. “When India got independence, it had a robust defence production ecosystem. Unfortunately, defence production in India was not focussed on post-independence….But we will now work towards breaking all barriers to promote defence production in India”
  3. “Efforts are being made to boost defence production, develop new technology and give a big role to private players in the defence sector.”
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The previous FDI in Defence policy

In 2016, the Department of Defence production issued a press note on the FDI policy in Defence sector.

Foreign Direct Investment up to 49% is allowed through automatic route and above 49% under government route wherever it is likely to result in access to modern technology or for other reasons to be recorded. Defence Industry subject to Industrial License under the Industries (Development & Regulation) Act, 1951 and manufacture of small arms and ammunition under the Arms Act, 1959.

The other conditions governing FDI Policy in defence manufacturing sector as notified in the Press Note 5 of 2016 Series dated 24/06/2016 are as under:

  • Infusion of fresh foreign investment within the permitted automatic route level, in a company not seeking industrial licence, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will require Government approval.
  • License applications will be considered and licenses given by the Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, in consultation with Ministry of Defence and Ministry of External Affairs.
  • Foreign investment in the sector is subject to security clearance and guidelines of the Ministry of Defence.
  • Investee company should be structured to be self-sufficient in areas of product design and development. The investee/joint venture company along with manufacturing facility, should also have maintenance and life cycle support facility of the product being manufactured in India. (Source: Department of Defence Production India website)
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Further, subsequent to abolition of the Foreign Investment Promotion Board (FIPB), the work of granting approval for foreign investment under the extant FDI Policy, has been entrusted to the concerned Administrative Ministries/Departments. The Department of Industrial Policy & Promotion, Ministry of Commerce & Industry has been given the responsibility of overseeing the applications filed on the Foreign Investment Promotion Portal (FIFP) and to forward the same to the concerned Administrative Ministry. DIPP has finalized a Standard Operating Procedure (SOP) for examination of foreign investment proposals by Administrative Ministries and placed on their website. (Source: Department of Defence Production India website)

The government should set up a task force to engage with potential investors and investees and evolve a simplified FDI policy, which has different slabs for different kinds of activities and is free from terms and conditions that are difficult to understand and implement. It will also make for better coordination if permission for FDI (wherever required) and grant of industrial license are handled by the same ministry. The proposed dismantling of the Foreign Investment Promotion Board opens a window for this reform. This will go a long way in making it easier to do business in defence.

Amit Cowshish, a former Financial Advisor (Acquisition), Ministry of Defence and Consultant, Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi.  Article link

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