India is looking for a breakthrough an in its defence sector by attracting foreign companies to invest in India using FDI policy under the ‘Make in India’ initiative led by NDA government. By this policy, foreign companies are able to invest in Indian companies by establishing foreign business operations, acquiring business assets, establishing ownership or controlling interests of the company. The salient feature of FDI is that it is not only a capital investment but also the exchange of manpower, technology and assets.
FDI AND BACKGROUND:
Way back in the 1970s, China adopted a new way for attracting foreign investments into their closed economy to meet their investment needs and to speed up the growth of their economy. Those investments played a major role in China’s development as we see today. This type of investment is the resultant of two components, Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) which is now referred to as Foreign Portfolio Investment (FPI). From there on, many countries started using the policy of FDI to increase their economic security.
STRATEGIES OF IMPLEMENTATION:
There are two strategies to implement FDI in a country:
• Greenfield investment
• Brownfield investment
The first strategy is the ‘Greenfield investment’ in which a company has to set up a new factory and related assets in another country and then start the operation. The second strategy is ‘Brownfield investment’ in which the investing company acquires a foreign company and start operation. Also, FDI is classified into two:
In Horizontal type, a company invests in the same type of business in another foreign country as they operate domestically. Whereas in Vertical type, a company invests in a business which acts as the supplier or distributor for their parent company.
FDI IN INDIA:
In 1991, according to the Foreign Exchange Management Act (FEMA) under the leadership of the Finance minister Dr Manmohan Singh paved the way for attracting foreign investment to India. Since then,FDI is a major source for developing the economy of India. In 2014 under the ‘Make In India’ initiative, the government upheld the limit on investment from 26% to 49% in the defence sector to attract foreign investors.It liberalised 25 sectors including the defence sector. It also included manufacturing of Small Arms and Ammunitions covered under Arms Act 1959. In April 2015, the FDI inflow has increased up to 48% when compared to the previous years. This made a leap for India’s leap from 15th rank in 2013 to 9thrank in 2014 in terms of FDI inflow.
PROGRESS OF FDI IN DEFENCE SECTOR:
The defence sector is the least beneficial in terms of FDI. According to sources, 70% of military requirements are met through imports whereas 30% is only domestically manufactured. The total inflow of investments through FDI is about $4.94 million from 2001 to 2014. The total cumulative FDI including all sectors is about $321.81 billion during the same period. It is evident that the contribution from the defence sector is very less. In 2016, the government introduced 100% equity in the domestic defence sector. According to this, the company can invest 49% through ‘automatic route’ and rest 51% through ‘government route’. This was introduced to utilise the ‘state of the art’ technologies with the support from other countries. It not only help the country to develop its economy but also to exchange technology.
CHALLENGES FOR FDI IN DEFENCE SECTOR:
Sadly, most of the investors are not interested to invest in India remembering the fact that the budding domestic companies in the defence sector are vulnerable. Some big companies stated that they need more management control to build and maintain high-class military technology in India. Only a few companies invested in this sector which ultimately compelled the government to increase the offset threshold to 2000 crores. From the period April 2014 to December 2017, India was able to attract only $0.88 million even after liberalising the FDI policy. By this time, Indian investments in other countries exceeded 1.25 lakh crores by signing in various deals. It includes import of radars and missiles from Israel, aircraft and artillery guns from the US, fighter planes and ammunition from France and rockets and simulators from Russia.
FUTURE OF DEFENCE SECTOR THROUGH FDI:
India is the largest importer of arms among other countries. It is because most of the defence equipment sectors are procured by the government and the exporting of such equipment has many regulations. India wishes to be one among the top 5 military equipment providers.To achieve this milestone, the government plans to further relax the FDI rules by increasing the automatic route investment to 74% from existing 49%. This was stated in a meeting convened by the Department of Defence Production. This will benefit sectors like:
• Fighter aircraft
• Medium lift and utility helicopters
• Land combat vehicles
• Autonomous weapon systems
• Missile systems
• Gun systems
• Small arms
• Ammunition and explosives
• Surveillance systems
• Electronic warfare systems
• Communication systems
• Night fighting enablers
Ultimately, India is expecting to prosper in its defence sector by domestically manufacturing military equipment by attracting the eyes of foreign investors and make India one among the global defence power. India also plans to increase the domestic production of equipment to 1.7 lakh crore by 2025 through FDI.