FDI IN DEFENCE PRODUCTS

FDI IN DEFENCE PRODUCTS

Context: Information regarding the Foreign Direct Investment (FDI) in Defence Products has been provided in a written reply to Rajya Sabha by Raksha Rajya Mantri Shri Shripad Naik .

FDI IN DEFENCE

WHAT IS FOREIGN DIRECT INVESTMENT (FDI)? A foreign direct investment (FDI) is an investment in the form of a controlling ownership in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. The origin of the investment does not impact the definition, as an FDI: the investment may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country. FDI IN INDIA Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. India disallowed overseas corporate bodies (OCB) to invest in India and imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%. Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012 As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware MauritiusSingaporeUS and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year. Nine from 10 largest foreign companies investing in India (from April 2000- January 2011) are based in MauritiusIn 2015, India emerged as top FDI destination surpassing China and the US.  India attracted FDI of $31 billion compared to $28 billion and $27 billion of China and the US respectively. India received $63 billion in FDI in 2015. India also allowed 100% FDI in many sectors during 2016.  WHAT IS THE IMPORTANCE OF FDI?

  • An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. 
  • Besides, the trade regime of the host country is named as an important factor for the investor’s decision-making. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. 
  • Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entity’s policies to a domestic subsidiary may improve corporate governance standards
  • Foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. 
  • The local population may benefit from the employment opportunities created by new businesses.

FDI IN DEFENCE PRODUCTS

In May, 2001, the Defence Industry sector, which was otherwise reserved for the public sector, was opened up to 100% for Indian private sector participation, with Foreign Direct Investment (FDI) up to 26% both subject to licensing. 

Further, Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce & Industry has allowed FDI under automatic route upto 49% and above 49% through government route wherever it is likely to result in access to modern technology or for other reasons to be recorded.

As per the data furnished by 79 companies that are operating in Defence and Aerospace sector, so far, FDI inflows of over Rs 1834 crores have been reported after 2014 under both government and automatic route. 

By allowing higher FDI in the Defence sector, the global companies having high-end technologies can be encouraged to set up their manufacturing base in India in collaboration with Indian companies, thereby resulting in creation of employment opportunities, saving of foreign exchange and increasing indigenisation. 

FDI is one of the sources which are available for the industry in order to access some of the technologies required to indigenously design, develop and produce the equipment, weapon systems/platforms required for defence.

WHAT ARE THE STEPS TAKEN BY THE GOVERNMENT TO BOOST THE INDIAN DEFENCE SECTOR?

  • Defence Procurement Procedure (DPP) has been revised in 2016 wherein specific provisions have been introduced for stimulating growth of the domestic defence industry.
  • A new category of procurement ‘Buy {Indian-IDDM (Indigenously Designed, Developed and Manufactured)}’ has been introduced in DPP-2016 to promote indigenous design and development of defence equipment. 
    • It has been accorded top most priority for procurement of capital equipment. 
  • Besides this, preference has been accorded to ‘Buy (Indian)’, ‘Buy and Make (Indian)’ & ‘Make’ categories of capital acquisition over ‘Buy (Global)’ & ‘Buy &Make (Global)’ categories.
  • FDI Policy has been revised and under the revised policy, FDI is allowed under automatic route upto 49% and beyond 49% through Government route wherever it is likely to result in access to modern technology or for other reasons to be recorded.
  • An innovation ecosystem for Defence titled Innovations for Defence Excellence (iDEX) has been launched in April, 2018 which is aimed at creation of an ecosystem to foster innovation and technology development in Defence and Aerospace by engaging Industries including MSMEsStart-upsIndividual Innovators, R&D institutes and Academia and provide them grants/funding and other support to carry out R&D which has potential for future adoption for Indian defence and aerospace needs.
  • The ‘Make’ Procedure has been simplified with provisions for funding of 90% of development cost by the Government to Indian industry and reserving Government funded Make-I projects not exceeding development cost of Rs.10 Crore & procurement cost Rs. 50 Crore per year for MSMEs. 
    • The industry funded Make-II Projects not exceeding development cost of Rs.3 Crore & procurement cost Rs. 50 Crore per year have also been reserved for MSMEs.
  • Government has notified the ‘Strategic Partnership (SP)’ Model which envisages establishment of long-term strategic partnerships with Indian entities through a transparent and competitive process, wherein they would tie up with global Original Equipment Manufacturers (OEMs) to seek technology transfers to set up domestic manufacturing infrastructure and supply chains.
  • Government has notified a Policy for indigenisation of components and spares used in Defence Platforms in March, 2019 with the objective to create an industry ecosystem which is able to indigenize the imported components (including alloys & special materials) and sub-assemblies for defence equipment and platform manufactured in India.
  • Government has decided to establish two Defence Industrial Corridors to serve as an engine of economic development and growth of defence industrial base in the country. 
    • They span across Chennai, Hosur, Coimbatore, Salem and Tiruchirappalli in Tamil Nadu and spanning across AligarhAgraJhansiKanpurChitrakoot and Lucknow in Uttar Pradesh (UP).
  • A Policy on ‘Utilisation of Third Party Inspection Services’ has been notified in May, 2018 for effective administration of inspection Services with involvement of third parties and promote Ease of Doing Business for MSMEs and private sector.
  • Offset guidelines have been made flexible by allowing change of Indian Offset Partners (IOPs) and offset components, even in signed contracts.  
  • Foreign Original Equipment Manufacturers (OEMs) are now allowed to provide the details of IOPs and products after signing of contracts. In order to bring more transparency and efficiency into the Offset discharge process, “Offset portal” has been created in May, 2019.
  • The Ministry has instituted a new framework titled ‘Mission Raksha Gyan Shakti’ in November, 2018 which aims to provide boost to the Intellectual Property Rights (IPR) culture in indigenous defence industry.
  • Defence Investor Cell has been created in February, 2018 in the Ministry to provide all necessary information including addressing queries related to investment opportunities, procedures and regulatory requirements for investment in the sector.
  • Defence Products list requiring Industrial Licences has been rationalised and manufacture of most of parts or components does not require Industrial License. 
    • The initial validity of the Industrial Licence granted under the IDR Act has been increased from 03 years to 15 years with a provision to further extend it by 03 years on a case-to-case basis benefit.

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