India’s journey to FDI in defence begins in 2001 when FDI moved from public sector to Private sector for the first time. The limit was kept at 26% in automatic route.
It was that time when India liberalised its economy and opened it up to foreign Investment. Initially, very few sectors such as manufacturing and mining were liberalised. Later, more sectors such as service, telecommunication and retail were liberalised. Since then, the country has welcomed many multinational corporations to invest; which resulted in a massive transformation of the economy in the last two decades.
Prime Minister Narendra Modi launched an initiative called Make in India, which was devised to transform the country into global design and manufacturing hub. The initiative was not only a call to action to Indian businesses, but also an offer to likely partners and investors across the globe. While the total FDI inflows in the country in the last 20 years (April 2000 to June 2020) are about 693+ billion US Dollars, nearly 50% of that was received in the last 5 years.
Presently, there are two routes under which foreign investment in defence can be made in India
- The automatic route – where foreign investment is allowed without prior approval of the Government of India or RBI in activities or sectors specified in the FEMA Regulations; The initial limit to the automatic route was 26%. That changed to 49% in June 2016. This changed in mid-September 2020 when proposal of the Finance Minister, Nirmala Sitharaman, was approved by the Union Cabinet – raising the maximum limit of FDI through automatic approval in defence sector to 74%.
- The Government route – where prior approval is required for foreign investment.
The recent change is with a view to attracting overseas investors and inviting foreign original equipment manufacturers to shift operations to India. This would also help private Indian entities to play a bigger role in defence production through collaborative development with foreign entities.
Prime Minister, Modi, in his address to the nation spoke about building an Atmanirbhar Bharat, or a self-reliant, resilient India, in defence manufacturing. He spoke about how the Government was trying to boost defence production by breaking all the shackles historically associated with it. His vision is to increase production in India, develop new technology in India, and maximise expansion of the private sector. Further liberalisation of FDI in the defence sector can be seen as one of the steps taken by the Government towards self-sufficiency in defence production.
The further liberalisation will, seemingly, not only boost employment opportunities in the country and strengthen relations across the borders, it will also help in the development of defence technology, reduce the costs of arms by developing them domestically and help build a self-reliant, resilient India, an Atmanirbhar Bharat.