FDI Inflows to Defence Industries

Abstract:

FDI inflows to defence industries is allowed up to a maximum limit of 26%. Approval of Foreign Investment Promotion Board (FIPB) is required for Foreign Direct Investments (FDI) in defence industries.

Until the late 1980s the Industrial policy of India kept the Defence industries of India, under the control of the Central government. In other words, all the defence equipments that were produced in India were manufactured by the public sector enterprises only. This was done in accordance with the first Industrial policy of India, more specifically, with the Industry Policy Resolution of 1948. According to the Industries (Development & Regulation) Act of 1951, licensing was made compulsory, which gave rise to a large infrastructure for Defence production facilities in India. It consisted of 39 Ordnance Factories, 8 Defence PSUs and 50 Research & Development laboratories.

In the early 1990s significant reforms were undertaken in the Indian economy. As a part of these reforms, certain areas of the defence industries in India were opened up to foreign investments. The FDI inflows into the Indian defence industry has shown rise in the recent years. The scope of FDI inflow in the Indian Defence industry of India is immense. The FDI in the Indian Defence industry is allowed up to 26%.

Approvals are required from Foreign Investment Promotion Board (FIPB). Further, approval of foreign direct investment into the defence industry of India can be received from FIPB subject to licensing under Industries (Development and Regulation) Act, 1951 and guidelines on FDI in production of arms and ammunition. From August 1991 to March 2004 the quantum of FDI inflow into the Indian defence industry was Rs 34.70 million. The latest role of private sector in the Defence industry of India, as sub contractors and ancillary equipment manufacturer is commendable. The requirements of the Defence industries of India are being met by the Small and Medium Enterprises (SMEs), to the tune of 20% to 25%. The FDI inflow in to the Indian Defence industry have witnessed participation of private sector in the area of -

• Supply of raw materials
• Semi-finished products
• Parts and components

Moreover, hi-tech defence equipments and component subsystems have also been outsourced from the private sector. The successful contribution of the private sector in the defence industry of India has moved to the next level and today their contribution is not only confined to manufacture of semi-finished products but also in the manufacture of complete defence equipments or systems.

Last Updated on 4/23/2011